Room For Improvement

Jan. 1, 2005
Ever increasing customer demands, changes in package sizes, and outsourcing can wreak havoc on DC performance. Here's what managers can do to meet these challenges and maintain productivity levels.

When it comes to distribution center productivity, there is always opportunity for improvement. DCs are struggling to keep up with constant changes in customer relationships, packaging sizes, and the effects of outsourcing. The result is falling productivity and increasing costs, which can eat into a company's bottom line.

One of the main drivers that impacts DC productivity is outsourcing. To cut costs manufacturing companies continue to outsource production activities both locally and to countries overseas. But outsourcing does more than trim expenses; it changes the entire distribution operation.

"Closing a plant in Ohio, for example, will change your transportation costs, delivery times and everything else. It will especially affect your distribution center productivity," says Steve Simmerman, senior vice president for logistics provider Swisslog, Phoenix, Ariz. "Material handlers should examine where their DCs are today, where they should be if they go to an outsourced model, and what should they be doing differently within the four walls of the DC that they are not doing today.

"There's a lot of process reengineering and facility redesign happening within existing building footprints," says Simmerman. "We're working with a company, for example, that manufactures household goods. For years they had a manufacturing plant with an attached DC. They have since outsourced all the manufacturing they did in the U.S. Now they are looking at a building that used to house manufacturing on one side and a high bay warehouse on the other side designed for inbound raw materials and components. They turned this skeleton of a building into a high-volume U.S. distribution point. Today they receive all products in containers from China, bring them in, palletize these loads, do QA, and store them, and basically now do high volume, direct-to-store distribution. But that's a very different business than they were in five to six years ago."

Because of outsourcing, for some companies the number of distribution centers in the U.S. may actually fall. "Transportation costs may result in two or three very large regional DCs to handle those costs. We see more customers building centralized plants," says Brian Hudock, a partner with supply-chain consultants Tompkins Associates, Atlanta. "Regional DCs are being consolidated or turned over to third-party companies to service smaller customers."

No Value Add, No DC
As retail customers scramble for profit, they demand that distribution centers take on new roles or make other quick adjustments. If no value is added, they will bypass distribution centers altogether. "There are manufacturers who let you go in and order directly from their systems, bypassing DCs and warehouses," says Dan Williams, marketing manager for adhesivelabel manufacturer Avery Dennison, Pasadena, Calif. Wal-Mart is doing this with some of its suppliers in its efforts to smooth out the process, he notes.

Many retailers are also changing the size and quantity of their shipments to DCs.

Distribution centers have always served to gather items from many sources and regroup them for various destinations. The change in pack sizes, though, is reducing the need for unpacking and repacking. The volume going through many DCs, however, is increasing as they receive and distribute more items. The effect on productivity can be huge.

For example, with fewer pallets to temporarily-store, a facility will need fewer pallet-sized racks, and more small-item racks. With fewer pallets to move, lift-truck requirements change. To handle the volume, material-handling managers will need to examine their present facility layout and storage needs, and possibly look into changes in automation equipment.

In a similar vein, consumer product goods suppliers are shipping pallets that are already sorted for their customers' stores. Here, DCs no longer need to group items per store requirements, but serve as buffer storage as pallets stay in the DC until enough accumulate for optimum cubing on a truck.

DCs have also taken on a number of valueaddingtasks to keep customers happy. These tasks affect productivity too, but many material handling managers are not factoring them into their productivity calculation yet.

For example, more DCs are handling the radio-frequency tag requirements for manufacturers. After the pallets of products come in from a manufacturer, DC personnel break them down, tag the cases and products, reassemble the pallets, scan them, and send them to the correct outgoing dock.

"There are technical and cost reasons why it doesn't make sense for manufacturers to handle RFID tagging," says Simmerman. "To be compliant with the mandate, managers at DCs are creating special one-on-one processes to handle those orders. But this results in a twotier productivity level as those processes aren't ready to be integrated with other outbound processing yet."

Rooting Out Opportunities
With tight budgets, the last thing DC managers want to do is spend money. Fortunately, there are always steps they can take to improve productivity that don't involve capital expenditure.

"People often focus on spending money to solve their problems, which ultimately you may need to do, but that is not where you should start," says Ned Bauhauff, a principal with consulting firm St. Onge, York, Pa. "First and foremost, understand the demands that are either industry or customer specific and then examine your DC processes to see if they are aligned to meet those demands." Examination is key, and something material handlers need to do at least annually; more often if the industry you serve is volatile.

A good place to begin is order profiling. Knowing what, when and how customers order can reveal how DC processes need to change. "Managers need to look at what their customers want, what kinds of orders they are making, and then look at the throughput needed out of the facility to handle this," says Hudock of Tompkins Associates.

Once you have the order profile information, as well as volume and material-flow data, which are all readily available in your ERP or MRP systems, look into low capital methods of changing the physical layout or setup of your facility.

"For example," Bauhauff adds, "examine lane depth and zoning. If products are being stored on the floor, you can adjust the depth of your zone or product categories."

Examine the facility setup to ensure that products with similar physical and throughput characteristics, such as shipping volumes and selection frequency, are grouped together. Ensure that there are enough pallet positions within each zone. And, to speed lift-truck productivity, arrange racks in such a way that lift trucks can go right in to select a pallet without shuffling other pallets first.

And don't forget to factor in buffer storage. "Not everything that goes into a DC is moved out the minute it's received, says Jeff Hughes, director of market development for automation supplier HK Systems, New Berlin, Wis. "There's staging time, processing time, and wait time for shipment."

Another idea is to look for ways you can outsource some of that storage along the supply chain line. "That way you can focus your DC on picking orders and getting them to customers rather than using the DC for inventory," says Hudock.

Time To Invest
After reorganizing the physical layout, then managers should examine whether they need to purchase new material-handling and storage equipment. "The first two steps of examining order profiling and facility layout help create a solid foundation for using your capital dollars in the best way possible," says Bauhauff, "and you have a sound understanding of the demand drivers in your business, you can get the best return on your investment in the right equipment and use it in the best way that you can."

"Then," adds Hudock, "you can make big changes if necessary. Some customers are moving from low rack-type pick systems to puttolight with a sorter drive pick engine and automation to feed the replenishment storage. For one customer, it allows them to receive and ship about 70 percent of their items per day."

Once the facility is properly organized, the next step is to balance the work force. "Putting in the correct level of automation can handle the peaks without adding more people," he continues.

"Many customers are looking at automation as a way to eliminate labor," says Swisslog's Simmerman. "Automation can help parts of the process and improve productivity, but it's best as part of a learn and grow strategy.

"Look for systems and equipment that can be re-purposed easily," he adds. "Consider the nature of your DC network. For example, one customer mandated pallet and case-level quantities in the past. Now their business has shifted to a case and 'each' environment. They are reevaluating all the automation in their facility given this change."

Volume is another key element to examine. "That's the other side of the equation," says Simmerman. "Off-shore manufacturing changes the composition of everything in the DC center. We do a lot of data analysis with our customers. We look at the SKU database, the volume, the order profile, the breakdown of orders by SKU, and so on. We then analyze the existing material flows and work with the customer to help them reengineer the processes." Such analysis typically takes a couple of months.

Volume will help managers determine whether they need automated equipment. If volume is sufficient, the need for automation can easily be justified. But if volumes are low, ROI will be harder to come by.

Another target for productivity improvement is to smooth out the "interfaces" among all the steps in your DC processes. Pallets, cases, and "eaches"—single item picks—go through multiple steps from manufacturer to DC, and each step is an opportunity for error or delay.

"You want to reduce variation where you can," says Rick Moradian, vice president, international logistics, APL Logistics, Oakland, Calif. "You want product to arrive on time, information to flow properly, the trucker to be at the right dock at the right time, and documents done properly. Handoffs, in particular, should be smooth."

"Look at DC productivity in light of constantly changing business," adds Simmerman. "Take a step back and ask what's changed in your business over the last few years. Are you doing it today like you were back then and are there ways to improve it? It doesn't take dramatic changes and huge improvements to realize significant savings. When you look at the true cost of carrying and handling inventory, any reduction in the total manpower required, the total inventory, or even the total number of touches on inventory can result in dramatic savings."

Design With The Big Picture In Mind

When arranging their facilities, material handlers tend to rely on either gut feel or experience. "Experience can be tremendous for running the warehouse on a day-to-day basis," says Ned Bauhauff, a principal with consulting firm St. Onge, York, Pa. "From a design standpoint, you need to step back and look at the data from a holistic, purist level. Often what happens statistically is not what happens when people view the floor. When you're on the floor, you're only seeing snapshots of activity. By doing a thorough data analysis, you get a much broader view."

Designing by gut feel can result in over design as the designer tends to remember the most catastrophic event they've experienced and design for that rather than for normal business activity. Consultants advise that DC managers should review and analyze their processes annually to ensure that they are keeping up with customer needs.

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