Companies are concerned about reducing costs in an increasingly competitive marketplace.
Reducing inventory while maintaining a high level of customer service is a necessity. To achieve this goal, inventory turns must be continuously evaluated. A new approach to increasing inventory turns can, in some cases, increase warehouse capacity and even avoid expansion or relocation.
There are three guiding principles to ensure you are getting the most out of your current facility:
One of the most important elements is the development of a detailed site plan. Columns, ceiling heights, different warehouse areas and racking are displayed on this plan. A complete inventory of all equipment is also drawn up in this phase of the assessment. All of this information will have an impact on the analysis of appropriate technologies for a better warehouse layout and space utilization.
A product database containing logistical information, inventory performance and annual transactions for each product will be a basic tool. As a result of this information gathering, it is possible to obtain a global picture of the warehouse activity. In fact, Pareto's law is often confirmed, about 20% of the products represent nearly 80% of the space and transactions. Another advantage of doing this analysis is to examine in detail the problematic cases. For example, an item with no inventory transactions and an excess inventory level are often a good source of space savings.
In addition, a good pre-location analysis would indicate the best storage and configuration that should also guide better space utilization. It is important to work closely with company management during this database review. The policy regarding the amount of product to be kept in stock must be rigorously established, as well as the policy regarding new products and additional transactions.
One of the most important cost factors is the labor used to perform all activities in the warehouse. From product receiving, put-away, picking, packing and shipping, all functions need to be examined in detail to reduce non-value activities, reduce travel time, consolidate activities, reduce exceptions and standardize processes.
To support this important review, a good mapping of existing processes should be done involving, if possible, the people doing the work, review these processes with an eye toward increasing productivity, test the new review process, and adjust according to the goal set.
The industry benchmark can guide you in reviewing and optimizing your productivity. New fixtures, equipment, infrastructure and technology would certainly facilitate the transformation process. The most important point is also to involve employees in the process and have them participate in testing and validation. Documentation and definition and tracking of KPIs would ensure continuity.
There is no such thing as a good operation, if the control of the operation is not optimal. The best support tool to ensure control is the WMS (Warehouse Management System). Products, stocks and transactions have been monitored, tracked and optimized with WMS for years. Unfortunately, many companies have not yet entered the optimization phase due to the amount of effort and transformation required to ensure that these systems are properly integrated, configured and maintained.
There are also many challenges that are part of this optimization opportunity, to name a few, full ERP integration, customer and client data integration, product logistics information to maintain, WMS warehouse labor and knowledge retention, customizing customer excesses and many more.
Having worked in this field for over 30 years, I would say that about 50% of the offshoring or expansion could have been avoided if companies had looked at these points in detail and invested in process changes instead of brick and mortar.
In the last few years the E-Commerce has increase to a point where organization are facing major logistics challenges. Not only the volume has increase but the composition, customer services expectation and transportation for the last mile delivery brought even more complexity to the operation.
Most of the organization are facing for years the challenges of optimization their known operation. Now the introduction of E-Commerce has completely change their references and are considering new operational scenarios, until now never considered.
The shopping experience
For the past years and decades, the customers were used to go the ne nearest store or shopping center to look for a product to buy. Now and for the years to come this same customer will probably start its buying experience by entering into a computer, then looking for a particular items on the Internet (Facebook, TripAdvisor or other) or through Google search engine.
Particularly in Canada in the last few years, the Internet on-Line experience has grown to about 5-6% of the total retail experience reaching 303 billion$ in 2014 and projected 338 billion$ in 2018. And according to sectors, the growth has been from 5% to 25% of the total shopping experience.
The customer expectation
The customer expectation relate to E-Commerce service level is very high and today’s offer from the major retails and industry is falling short. For example, cost for order delivery is most of the time expected to be free and retailers are imposing minimum buy to offer free shipping, some other will impose a fix cost per order representing a fairly large proportion of good purchase. Delivery delays is another great debate in the industry from the same day offering from Amazon to 5 to 8 days in a large country such as Canada for retailers having only one DC in the Toronto area. Free return cost and ease to return process is also an important expectation from customers.
Another very important aspect will be the product availability in relation to promotion or commodity offering. Customer expect the WWW level of service: meaning Whatever, Wherever, Whenever…
The Logistics operation
Without any doubt, the most important element of a good E-Commerce operational strategy is to understand the complexity and interrelation of various factors influencing performance. Globally three important operational phases characterize E-Commerce operation.
Phase 1: Start-up and understanding; the E-Commerce business operational model (stock or cross dock), product profile (small, medium large product), order profile (number of expected order, items per order, unit per line), service level as its relate to cut-off time and transport pick-up, technology support requirements;
Phase2: The technology phase; the organisation will require to invest in understanding all operational aspects to streamline and reduce complexity. Most of the time this will relate to best of bread WMS implementation and optimisation. Understanding the suppliers, customer, product, order and transportation details. Some level of first level automation may exist to improve picking and packing processes.
Phase 3: E-DC automation; at this phase organisation are passing 10,000 orders per shift and are considering automation in all aspect of the operation. Receiving process will be optimize using suppliers relationship to identify product-order, pre-sort items to be received, specialize receiving process according to item size and particularities. Picking will be fully automated using pre-cartonization and pre-carrier assignation, automatic carton former, invoice induction, print & apply, picking in a good to man or zone picking, case closing and automatic sortation.
Operation Phase challenges
As easy it is to describe various maturity phase, as difficult it is to projected six month in advance. This is because in order to design the next phase capacity you would need a minimum of 6 to 12 months to design, estimate, found and implementation those describe technologies.
The start-up is definitely the most fragile phase as the company launch the e-Commerce business with minimal expectation. The operation most of the time start with minimal investment, technology and infrastructure, investing in order creation than in logistics operational support. The critical moment come when at 2000-3000 orders level with 2-3 item per order. Management looking at the next phase not knowing the growth rate.
The transition phase is by far the most challenging period of the company growth path. The management has pass the start-up phase, build good understanding of the business and require logistics support and now they are facing important business growth as they will expand their reach to the market. Then come the logistics capacity to growth with the expected order increase and most of the time number of item per order will also increase. Important questions to be answer, in-house versus outsource (3PL) operation, build capacity for storage as we pass from cross-dock to stock inventory, detail E-Commerce WMS information systems implementation and support, start to think about next phase automation solution.
The automation phase will be in scope when the quantity of order reach 10,000 with 3-5 items per order. Then growing with only the WMS or partial automation will not be sufficient to absorb the regular business nor be able to support peak order period. It is important to note on this last point that December could generate 3 time the amount of regular order. Then automation become the only solution with automation relate to: case former, document insertion, picking automation, case closing and sorting equipment.
Those are few points to consider when planning and building E-Commerce business case. Many other points would need to be study in details in order to understand challenges facing E-Commerce business and logistics support challenges. Of course we could add: the market segment, the business model (stock versus non stock), delivery and return strategies, product range offering, type of product (ex: food vs pharmaceutical vs electronics) and many more. The most important point is to really build a solid team of professionals that will help in developing the best sound and scalable logistics to support the business growth.
Before purchasing an automobile, it makes sense to take it for a test drive. Likewise, before spending millions of dollars on a new distribution center, it makes sense to take it for a test run.
What is Simulation Software?
Simulation software is a new procedure used more and more, to test and visualize new warehousing projects. The simulation in fact helps identify weaknesses and inconsistencies of the warehouse design which wouldn’t always be obvious.
Simulation can also be used as a decision helper. You can decide between making modifications to your existing distribution center or the construction of a new one, and simulation helps you to be able to make the right decision. The simulation could show you the results of the two alternatives in order to measure advantages and disadvantages of each.
Simulation software allows you to:
Simulation: An Efficient Tool for a Working Team
Simulation can become a strategic tool to generate ideas and improvements for a distribution center. Thanks to simulation and 3D animation, you can witness ideas become reality before ever physically modifying the warehouse. On the computer screen you are able to see the different solutions proposed. The simulation makes us realize how a simple modification can change the whole system.
Furthermore, simulation becomes an effective way of communication for the improvement of the distribution center. Verbal communication between people, departments, and shifts quite often becomes diluted through personal interpretation. A simulation video resolves this confusion by giving everyone exactly the same message. A simulation model enables you to show various conveyor alternatives by demonstrating how racks would be stored and retrieved. In one example, employee groups were able to configure a highly efficient automated plating rack storage and retrieval system. This added value would not be so easily achieved without simulation.
The necessity of exact data
The first rule in order to have an appropriate simulation is to always question oneself on the total process. It is of important to be sure that all results are consistent with both the applications and the context simulation. Too often people tend to believe that the data given by their computer is exact, however no simulation is 100 % reliable. An error in data or a misinterpretation could destroy all the effort you have put into it. The chances of success for a simulation are as good as the accuracy of data you have collected. Without the appropriate information, it is not recommended to simulate since the results will be erroneous, therefore unusable.
One of the greatest challenges that engineers face in building simulation models is to make assumptions that will simplify the model but at the same time include sufficient details to describe the real system. There are no rules to determine up to which degree a model can be simplified in order to make it useable. The simplification of a model relies above all on the simulation objectives. Nevertheless, it is important to use logical assumptions in order to create a useable model. To make assumptions on a model is an art more than a science.
Dynamic flow-thru warehousing minimises both handling equipment and inventory whether it is being used to support high-throughput manufacturing or finished goods distribution. Flow-thru warehousing shares much in common with cross docking. Both strategies support high-throughput manufacturing plants and distribution centres. Both are designed to maximise the handling and storage of inventory in warehouses through the frequent deliveries of merchandise.
Cross-docking vs Flow-thru warehousing:
First is the unit size. While cross docking involves the reconfiguration of pallets and cases, flow-thru warehousing may see the break down of the contents of a case to manage the redistribution of individual SKU items.
The second differentiator is time. Cross-docked pallets move through the distribution centre with a sense of urgency. Flow-thru warehousing allows for staging, processing, and the addition of value to a product. When merchandise arrives, it’s delivered right to temporary storage at a pick face, where it will be until processing.
If cross-docking could be summed up as “here today and gone today”, then flow-thru warehousing might be thought of as “here today and gone sometime this week”.
Operational characteristics of flow-thru warehousing:
Prominent technologies of flow-thru warehousing:
The future of Flow-thru warehousing:
While flow-thru warehousing is common in the grocery and retail industries, the impediment to its widespread use has been the reluctance of manufacturers to be partner in this strategy. Most manufacturers want to manufacture and ship full truckloads of a product with minimal warehousing on their parts.
When looking at the next millennium, one can see that roles are changing, especially as commerce on the Internet continues to evolve. The distribution centre of the future may well be a clearinghouse for information as well as for products. Centres will be a combination of order assembly and value-added services in a flow-thru environment.
Rather than shipping their products to a distribution centre, manufacturers will hold inventory at their facility until a distributor has received an order. In fact, they may utilise postponement strategies or adaptable manufacturing to reduce their inventory carrying costs. Materials delivered to the warehouse will be assembled with other inventory at a pick face, value will be added, and it will flow on out to the customer.
Such warehouse is a reminder that strategies such as flow-thru warehousing will make today’s expectations for more efficient operations, a reality in the next millennium.
Specific to the grocery industry but also to other retailers, Direct Store Deliveries (DSD) is being increasingly questioned by members of the retail industry for its value in the supply chain. Initiatives like Efficient Consumer Response (ECR), Collaboration and Activity Based Costing (ABC) contribute to this industry-wide questioning. Eager to optimise their distribution fleets and warehouses, retailers are approaching manufacturers with centralised initiatives with a price reduction.
Today’s market requires from the DSD manufacturers to quantify the benefits of DSD and explain them to their counterparts. Analyses conducted by both manufacturers and retailers have to take into consideration the full spectrum of activities performed: delivery, stocking, loading the shelves, etc. Often overlooked is the realisation that most of the products going through DSD channels are highly expandable, which means that promotions and merchandising have significant impact on consumption. While a lot of recent talks on DSD revolve around discussions on delivery, DSD retailers must emphasise the effectiveness components inherent to their distribution mode such as promotional execution and expert order writing.
Viewed as a source of tremendous savings in the grocery industry, ECR initiatives does not appear to be compatible with DSD practices. Manufacturers eager to maintain their competitive advantage through DSD must now demonstrate their capacity to face the upcoming information and quick response challenges.
While “effectiveness, not just efficiency” may be the go-to-market battle cry of many DSD vendors today, operational bottlenecks are still a very real issue for both retailers and suppliers. Although many solutions are available, today’s three largest opportunities for improvement areas are:
Another crucial area for improvement is time window for delivery. Retailers wanting to reduce their operational costs and cities wanting to solve urban congestion problems continuously challenge time windows and try to make them smaller. This constraint by itself is the cause of most of the Logistics costs of manufacturers as it directly impacts on the truck fleet.
While initiatives to improve the effectiveness of DSD are numerous, one appears to have greater potential: Scan Based Trading (SBT). This concept integrates the philosophy of VMI (Vendor Managed Inventory) with information exchanges captured by the Point Of Sales (POS).
Through this initiative, manufacturers are responsible of their inventory until it is being scanned at the counter. Such practice allows eliminating back door checking and also opens the door to potential 24-hour/day availability of point of sales to receive merchandise. Indeed, since retailer’s clerks are not required to acknowledge receipt of the goods, manufacturer may come at any time to deliver. The manufacturer manages inventory and the salesmen establish replenishment orders. Inventory is transferred at time of purchase by the end user.
While information exchanges between business partners are already common, challenges remain. Indeed the format of data exchanged is not always standardised and manipulations are often required by either one of the partners, as their system is not yet equipped to receive such information.
Such practice allows to considerably free-up back doors while allowing for optimised delivery routes to be built. Other approaches like audit checking (random) are also being tested to streamline processes
Supply chain functions have grown increasingly complex with globalization, technology, and competition advancing at a rapid pace. Thoroughly examining the motivations, expectations, and justifications for outsourcing critical supply chain functionality enables companies to make effective decisions which generate incremental profitability and shareholder value.
While these and other valid and appropriate motivations drive outsourcing decisions, some companies use inappropriate reasons to justify their decision to outsource. Some companies choose to outsource simply due to lack of understanding of logistics processes. Other companies justify their outsourcing decision on the ability to better identify the true cost of supply chain operations.
Companies should first seek to understand their true logistics costs prior to outsourcing in order to make better decisions and build better relationships. Some companies want to off load the problems and issues associated with managing logistics operations. They mistakenly believe they can transfer the inherent problems and shift responsibility to a partner for resolution and not be involved with the detection, communication and decisions required to effectively resolve and reduce problems and performance issues.
Some companies never consider outsourcing or eliminate the strategic option of outsourcing too early in the supply chain strategy development cycle due to reasons that can be just as inaccurate or inappropriate as poor reasons to outsource. In-sourcing rationale may include an unconfirmed perception that cost will increase if an operation is outsourced. In many cases, this view is expressed by companies that do not know their true cost of supply chain operations. Another popular perception is that customer complaints will automatically increase due to decreases in overall service levels if an operation is outsourced. The belief is that the partner will not care about the business as much as internal employees do. This perception is based on the assumption that 3PL providers only care about their revenue which will not be the case if requirements are properly defined and contracts properly structured.
Managing the relationship
Here are some points the companies outsourcing their logistics should do and manage regularly:
Define management roles & responsibilities. Make sure you define a competent and strong management team with deep experience in managing a 3PL relation. Defining all sort of rules and KPI is necessary, but making sure the 3PL perform according to expectation is the most important element of success.
Define KPIs. Develop a set of highly descriptive key performance indicators (KPIs) that include precise times, quantities and other numerical measurements so that everyone is on the same page about what it will take to achieve acceptable on-time, accurate and cost-effective performance levels.
Establish a reporting schedule. In addition to giving you consistent access to the measurements you value most, the consistency with which your 3PLs stick to this reporting schedule is another good measurement of their ability to meet your company’s needs.
Take advantage of visibility systems. Have your 3PL set up visibility tools to prompt your company anytime there’s a notable exception to a delivery schedule, fulfillment rate or inventory level. That way you can easily pinpoint any minor performance glitches before they result in supply chain disruptions.
Continuous improvement. Many 3PLs now participate in continuous improvement programs such as lean. Encourage your 3PL to include your company in these programs, because the tools these programs rely on usually include a variety of detailed performance measurements — and improvements.
Perform operation audit and compare with best in class references. Consider compiling a set of performance reports that rank all of your 3PLs based on the same metrics — and then share the results with all of them. Knowing how they stack up against the competition can be a powerful incentive for 3PLs to either improve what they’re doing or keep up the good work.
One attending conferences such as the CLM and WERC or reading specialized magazines can do nothing but realize that the performance gap is widening between the supply chain in the global marketplace. And the difference can sometimes be scary.
As consultants, we are exposed to numerous business practices and can only testify to this widening gap. Best-in-class companies are always exploring new manners of doing business and integrating their supply chain while the vast majority of companies are struggling, on a daily basis, to stay average. In an article, Mr. LaLonde, professor emeritus of Logistics at the Ohio State University, stated three main reasons for this widening gap.
Information technologies are playing an ever-growing role in all aspects of today’s business relationships. Everybody agrees that it will also be a key driver within the next decade. We have all heard of companies failing to implement new information systems or falling short of their initial objective, such companies will have to realign their processes quickly if they do not want to be left behind. Management and integration of information technology change is a key factor in the widening gap. Many systems are simply becoming an entry ticket in developing business relationships with leaders.
Already extremely complex within a company, change management must be achieved with your supply chain partners. Furthermore orchestrating such changes is increasingly complex as the number of players increases. But change management is a pre-requisite for companies wanting to achieve world-class performances. Failure to effectively manage the process can result in a company being outperformed and outclassed in its competition.
While a company’s past as well as its culture can be a valuable asset, it can also be a bullet in today’s fast moving environment. One can wonder why start-up companies often are considered “best-in-class”; they have no baggage and make up the rules as they go along.
Companies have typically been organized in pyramids and information tends to flow vertically. Today’s business shift towards the customer requires companies to be managed horizontally. Initiatives such as value chains, supply chains and other reengineering processes all focus on the customer to reinforce that need. Too often, conservative companies fall short from shifting their organization horizontally, as the basic organizational structure remains vertical.
Although we may sound alarmist, companies that have a tendency to fall behind could find themselves ahead of the others if they surf the information wave. Indeed, changes are happening at the speed of light in this industry and today’s best-of-breed systems will soon be outdated. And everybody agrees that we haven’t seen anything yet as the information pace will keep increasing.
Business decision-makers today must find a way to use technology to become low-cost producers. The challenge will remain to replace highly paid resources by low-cost systems yielding equivalent (if not better) results in specific areas. Such systems will contribute in making the supply chain process a more controlled and chaos-free process.
Successful management and performance of global supply chains will be an absolute business imperative in the future. Every supply chain manager needs to understand this unalterable fact. Business is becoming increasingly global and the rapid explosion of e-business will not allow us to play catch up.
As logisticians you are faced, on a daily basis, with struggles to reduce costs while providing a world-class service level to your demanding customers. On many occasions you are also faced with unexpected demands from the purchasing department (truckload promotions) or the marketing department (special deal, customized packaging) that greatly impede your operation. These oblige you to incur additional costs that are, most of the time, not considered in the rational analysis performed by the other departments.
Throughout the years, as the logistics functions gained more and more place in organizations, the total cost concept has emerged. Within this concept, the total cost of a product (manufacturing, storage, distribution,…) is calculated prior to taking any action. Already widely used in the manufacturing industry for product profitability analysis, the Activity Based Costing methodology is growing in popularity in the logistics field. Such approach easily allows managers to understand the total cost of a product or process and also to pinpoint any non value-added activity.
Over the past years, The “Logistics Consulting” division of The GCL Group has acquired a solid experience in Activity Based Cost Management (ABCM) in the fields of the integrated logistics. Our typical mandates cover the order fulfillment process from order taking through to cash collection. We provide our clients with a user-friendly model allowing them to perform “what-ifs” simulations. Our interventions are either focused on product costing or customer costing.
What is Activity Based Cost Management ?
Activity Based Cost Management (ABCM) is a process to align revenues and costs to business processes and activities. It is based on the premises that effective cost management should:
What does it do ?
The successful steps to the development of an ABCM model
The development of an accurate Activity Based Cost Management model is the road to success and will allow you to gain respect within management. It is a tedious process that requires a structured methodology in order to ensure that every portion of a process is captured by the model.
Through the completion of many successful projects, we have developed a structured approach in six steps that allows the development of an accurate model. Following is a description of these steps:
Step 0 – Project scope
Prior to performing any observation and analysis, it is of utmost importance to clearly identify the scope of the project, the expected results and expected utilization of the model. Such clarification allows everybody to clearly state their expectation and also understand the limitations of the model to be developed.
Step 1 – Process mapping
Once the objectives and scope have been clearly identified, you must proceed to the mapping of the current processes. Such mapping can be achieved through observations and interviews with related individuals. We adopted a top-down approach in which we start by defining the core operating processes followed by the business processes, then we identify the activities that are themselves composed of tasks (refer to drawing). Once the relationships between all the activities have been clearly understood, we are ready to proceed to the next step.
Step 2 – Data collection
Once the processes have been clearly identified, we proceed to the data collection. Such data will then be used to feed the model with costs, practices and patterns (e.g.: customer order pattern). Do not underestimate the length of this step, as valuable information is always hard to obtain due to the numerous sources of information and systems in place. At this time, the data collection should also be focused on providing the activities of the process with the required information in a fashionable format.
Step 3 – Activity costing
The purpose of this step is to link resources to activities in order to develop activity costs. At this stage, the information gathered through the interviews and data collection will come in handy as you will have to determine the first stage or “resource” drivers. These drivers should be selected in such a way that they are easily measurable through time and that will remain meaningful, as process becomes more efficient. As an example, you may use resource drivers such as: percentage of time spent, minutes per activity unit,… In order to perform the activity costing, you will have to assign the costs from the general ledger to the activities.
Step 4 – Product (or customer) costing
Once the activities have been costed, you are now ready to proceed to the product or consumer costing. At this stage you will assign activities to products based on your previous observations and data collection. Each product or customer will consume activities at its own pace and quantity. In order to proceed, you will have to determine second stage or “activity” drivers. These drivers may be: number of work orders, receipts, customers, calls, lines processed,…. According to the type of process analyzed and objective of the model to be developed (product or customer oriented).
Step 5 – Model development
This step is also of utmost importance as it will allow you to format the information in such a manner that it will easily be understandable while providing accurate and quick response to any simulation to be performed following the model development. When developing the model, be sure to document any assumption made and calculation steps. Once developed, the model should be benchmarked with current practices in order to ensure its validity. We also recommend that you perform simple and instinctive simulations to verify that the model responds accordingly.
Step 6 – Simulations
Following the development and benchmarking of the model you are now ready to proceed with “what-ifs” scenarios. Simulations should focused on evaluating the impact on eliminating non value-added processes or changing the logistic practices of your clients. Once you will start generating scenarios you will realize the power of these models and the related savings that you will be able to attain. As a rule of thumb, experience shows that you should only plan for 2/3 of the announced savings due to the assumptions made throughout the process and all the unexpected events that will occur prior to realizing the expected results.
Unleashing the power of numbers
While traditional accounting fails to provide logisticians with a clear and realistic view of their operation, Activity Based Costing proves itself to be a very powerful tool that can, when properly used, be a very efficient tool to outline any non value-added activities. As customers become more and more demanding, suppliers are faced with a need to cut any excess activity in their processes in order to be more efficient and remain competitive. Furthermore, through information exchange supplier can accompany their clients in improving their logistics practices to develop a win-win situation. All these are now reality to many industries and what better tool is Activity based Cost Management to clearly picture an operation and streamline its processes.
Privacy policy - All rights reserved
