Census of Distribution: IT to the Rescue

Aug. 1, 2006
Nobody who has ever been asked, "Have you tried rebooting?" by their friendly help desk person really expects information technology to transform the day-to-day operation of their distribution operation into a walk in the park.

Still, when integrated with the right order fulfillment processes, a new warehouse management, demand planning or order management system, can do wonders to streamline information and material flow.

Indeed, of the facility managers surveyed for the MHM Census of Distribution, a large majority (81%) of technology users reported that their IT investments have paid off to some extent. One quarter of respondents said that IT has contributed to a "major improvement" in warehouse efficiency over the last three years. Another two thirds (64%) of managers who have deployed IT say that it has delivered at least "some improvement" in operational efficiency.

Of course IT is not always necessary. One out of ten operations still manage their distribution activities without any kind of software support. Of those facilities that do rely on information technology to manage their business, a warehouse management system was the most popular IT investment. Other popular IT tools include electronic data interchange (EDI), which is used to send and receive orders from trading partners, and financial management tools. The majority of Census of Distribution respondents had deployed three or fewer software systems.

When it comes to budgets and annual IT spending, technology vendors are constantly pushing users to invest in software and hardware at a faster pace than their competitors in order to achieve some kind of performance advantage. Such advantages can translate into cost and other advantages in the market.

To find out what types of operations tend to be early adopters, and whether they are achieving a performance advantage, MHM examined the activities of heavy IT users (those facilities that have deployed four or more IT applications, including RFID) with average users (those that have deployed less than four IT applications).

Average and heavy users of information technology differed little in the age of the facility or average employee wages. But more IT-intensive operations tend to be larger, they employ more people and they manage more than twice as many SKUs and suppliers.

On the performance side, IT usage had little impact on storage utilization rates, on-time delivery, order accuracy, customer delivery lead time or inventory turns. Heavy IT users did report higher productivity: orders per hour, lines picked per hour and items picked per hour. They also reported a much lower median cost per order, $27.50 vs. $45.00; and a faster median time from order release to shipment, 8 hours vs. 15 hours.

Source: MHM 2005 Census of Distribution. Research conducted in partnership with The MPI Group (Cleveland) and Industry Insights (Columbus, Ohio), two industry and market research firms. See www.mhmonline.com/cod for more results and the research methodology.

Snapshot of Heavy vs. Average IT Users

Average IT users, medians Heavy IT users, medians
Years in operation 15 16
Wage for direct-labor employees (hourly rate without overtime) $12 $12.6
Total labor cost per direct-labor employee (wages, taxes, benefits, etc.) 37,440 37,980
Warehouse storage square footage 45,000 83,000
Full-time equivalent employees 48 102
Total number of SKUs 3,150 8,000
Number of current suppliers 30 80
Annual storage utilization (occupied capacity / total storage capacity), %: 80% 82.0
Dock to stock time (receipt to storage time in hours): 3.0 4.0
Order fill rate (orders filled complete / total orders), %: 97.9% 97.0%
Order accuracy (error-free orders / total orders), %: 98.2% 99.0%
Line accuracy (error-free lines / total lines shipped), %: 99.0% 99.0%
Perfect order rate (perfect deliveries / total deliveries), %: 98.0% 98.0%
Customer delivery lead time (receipt of order to delivery), days: 3.0 3.0
On-time delivery rate (orders delivered on time / total orders), %: 97.5% 97.0%
Total inventory turn rate (annual dollar-volume shipments / average on-hand inventory), turns: 6.0 6.5
Orders per hour (orders picked or packed / total warehouse hours): 6.0 10.0
Lines picked per hour (lines picked or packed / total warehouse hours): 20.0 30.0
Items picked per hour (items picked or packed / total warehouse hours): 62.5 100.0
Cost per order (annual labor and overhead costs / total orders), $US: $45.0 $27.5
Order cycle time (order release to ship time), hours: 15.0 8.0
Total responses for each metric range from 196 to 405. Average users: facilities that have deployed less than four IT applications. Heavy IT users: facilities that have deployed four or more IT applications, including RFID.

Four out of five respondents to the Census of Distribution survey report that their use of information technology has improved warehouse efficiency over the past three years.

RFID Gains a Foothold

Census of Distribution. Facilities that were part of a larger company, perhaps because they tend to have higher capital investment budgets, were more likely to deploy the inventory tracking technology.

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