Perspectives on Material Handling Practice

Papers the in the Perspectives Handling series have appeared 1992 in conference the present. proceedings As such of Material Institute between and they provide a point of reference as to how the industry is changing as well as insight into accepted practice during this period. In many cases the authors credited have either changed jobs or are no longer in the industry. Some companies as well have been the subject of mergers or reorganization with a new corporate identity.

STREAMLINING THE LOGISTICS PROCESS

Eric Peters Vice President Client & Market Relations Tompkins Associates, Inc. 2809 Millbrook Road, Suite 200 Raleigh, NC 27604

Introduction

Logistics, what is it? The 1990s have proven to be an exciting time for logistics. The 1990s have seen the reengineering of the logistics pipeline. The 1990s have seen the birth of the term Supply Chain Management. The 1990s have seen Efficient Consumer Response (ECR). The 1990s have been a period where these topics have found themselves on the desks and minds of CFOs across the country. And consequently, the 1990s have been a period where confusion has reigned in the logistics arena. Companies are now realizing the potential savings associated with an efficient logistics network. Unfortunately, many companies do not realize exactly what logistics is or what the subject of logistics entails. Because many companies have a vague understanding of the topic,

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they rely on the experts to tell them where the savings might be found in their logistics pipeline. Unfortunately, what this help has spawned is a volume of buzzwords and acronyms and a lack of understanding of what is necessary to achieve logistics excellence. Logistics is most often thought of as a military term. Websters Dictionary defines logistics as the branch of military science having to do with procuring, maintaining, and transporting material, personnel and facilities. The most successful military campaigns are the ones where the victor has had a superior logistics network and has been able to efficiently and quickly move troops, supplies and equipment. Desert Storm is an excellent example of the role that logistics plays in a winning campaign. Logistics in the business world is very similar to logistics in a military sense. We in business are trying to find the most effective methods to move product. We are trying to efficiently utilize our resources. Logistics must also be recognized as a critical factor to a companys success and companies must invest accordingly. Companies must also realize that a strong leader is necessary to lead the logistics efforts. And like the military, companies must realize that logistics improvement methods must involve strategy and a definition of the major logistics fronts. And just like in a military war, where each of the fronts must be worked in an integrated fashion, so too must we develop a strategy to work all of the logistic fronts. So what are the logistics fronts? Three of the logistics fronts are: Distribution Information Technology Warehousing

Each of these fronts must be worked. The following subsections detail each of the fronts and the opportunities that exist in working these fronts.

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Distribution Distribution opportunities are global operations strategies that a company must map out to be successful in logistics. For too many years, no attention has been paid to the methods of physical distribution. Distribution was not included in conversations between manufacturing and sales and marketing. Distribution was thought of as a non-value added process that only added cost to the product. Fortunately, this thinking has changed and today there are many global strategies that companies must pursue to be successful. The first distribution opportunity is in the creation of pull systems. A pull system is a distribution system where the product is pulled through the distribution channel. The pull is based on satisfying the needs and demands of the customer. Point of sales (POS) information is captured at the retail level and that information is used to determine replenishment requirements in the retail distribution channel. This information in turn drives the demand in the wholesale and manufacturer distribution channel. The consumer is pulling demand through the chain. In a push system, the manufacturing of goods is based upon obtaining manufacturing economies of scale. What is produced and the quantities produced are based not on consumer demands, but on manufacturing capabilities. As a result, the manufactured product is not being pulled by the consumer, but rather is being pushed upon the consumer. Push systems are fast becoming a thing of the past as the power in the distribution channel has shifted from the manufacturers to the retailers. Every participant in the distribution channel must then be able to support a pull system. The retailer must be able to collect and disseminate POS information. The retailer must then be able to transmit this information to the distributors and manufacturers. The distributors must be able to quickly turn their inventory and maintain high levels of inventory accuracy as the retailer is going to be demanding just-in-time delivery of merchandise. The manufacturers must be

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flexible and adaptable in their manufacturing process to provide the quick changes necessary to support pull technology. The manufacturers, like the distributors, must also be able to provide quick and accurate delivery of merchandise. The second distribution opportunity is in customer service. In todays world, customer service is a confusing term. Some of the common misconceptions of customer service are that customer service is a smile, or that the customer is always right. Neither of these two are true. Customer service is something much more than a superficial smile or a nod to the customers whims. Many times the customer does not even know what they want. Three questions must be asked to address the issue of customer service and logistics: 1. Who is the customer? 2. What does the customer want? 3. How do we increase customer satisfaction? In asking these questions, one will understand that the logistics customer wants: 1. Reduced costs 2. Increased quality 3. Teamwork/partnerships 4. Responsiveness By understanding these wants of the customer, an opportunity exists to build a better relationship with the customer. This improved relationship will result in long-term sales opportunities. The third distribution opportunity is in network rationalization. In the past, the locating of distribution centers was a function of how to provide superior service levels to ones customers. The number of distribution centers was typically dependent upon the service level and the number of markets a company wanted to service. The two drivers of these service levels were the time it took to process an order and the cost and time to transport the product from the

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distribution center to the customer. The less efficient the processing of orders, then the more distribution center required. The location of distribution centers is still dependent upon providing superior customer service. The difference today is that information technologies now make it possible to significantly reduce the time to process an order. Couple that with newer, more efficient storage and material handling technology, and what we have is an ability to more quickly process and flow goods throughout the distribution center. As a result, a company can now provide the same service levels, but be further located from the actual customer locations. The second factor that allows for the consolidation of distribution centers is the successful deregulation of the transportation industry. Deregulation has allowed for better service in the transportation field and created an environment of competition. As a result, companies can now get better service at a lower cost. This has allowed companies to consolidate distribution operations, reduce their total transportation bill and still meet their service requirements. An economy of scale is then realized as companies reduce the number of distribution centers. Less inventory is required, and subsequently less total storage space is required. The economics of fewer distribution centers will also result in a reduction in the total operating costs for the distribution operations. And finally, fewer and larger distribution centers will make the justification of automated technologies easier. Not only are companies reducing the number of distribution centers in their network, but they are also beginning to question the location of their distribution operations. Population shifts, labor costs and local business climates are all factors contributing to the relocation and realignment of distribution networks. This relocation, coupled with fewer and larger distribution centers, is providing companies with significant savings relative to logistics.

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The fourth distribution opportunity is in inventory reduction. It is sometimes said that the best inventory is no inventory. This is obviously not true, for inventory is required to ensure superior customer service. What is understood though, is that excess inventory exists in our distribution networks today. Part of the reason for excess inventory is because many companies have too many distribution centers and the information reflective of total inventory is site specific and not global in nature. Companies cannot isolate excess inventory on a global basis and thus the true picture of the excess is masked. The second reason for excess inventory is that companies do not have information technologies that support 100% accurate inventory. If a companys inventory is not 100% accurate, then the buyers and inventory planners must protect their inventory position by carrying a little extra stock. Unfortunately, no one ever goes back and reduces the little extra when that information becomes accurate. And, as a result, inventory balloons are created. It is no wonder that it is easy for companies to arbitrarily reduce inventory. The fat is everywhere. The benefit associated with reducing inventory are plenty. Smaller distribution centers, less working capital tied up in inventory, less obsolescence, and the ability to more quickly respond to changing customer demands and needs are benefits. All are necessary if a company is to have a superior logistics network. The fifth distribution opportunity is in centralization. For many companies, the distribution process has been site specific. In fact, in many companies there was not one individual responsible for logistics. Today we are seeing a centralization of the distribution function. The title of Sr. Vice President of Logistics exists in many companies. With the new focus on centralized distribution has also come the need to centralize the buying, inventory management, order processing and transportation management functions. This trend will

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continue and will be required if companies hope to integrate the distribution process into the total business process. The sixth distribution opportunity is in strategic planning. For years, logistics was not included in the business planning process. It was thought of as a non-value added process. Companies are now beginning to realize that distribution is a key element of success. Companies are developing 5 year distribution strategic master plans. Companies are finally coming to the realization that a significant amount of capital is spent on the physical distribution of product and that a plan is necessary to best manage this expenditure. Companies are also beginning to realize that the rapidly changing business environment requires a planned and proactive approach to distribution. Information Technology The second logistics front is information technology. Sometime around 1990 we exited the industrial revolution and entered the information revolution. Consequently, the solutions that are now being developed and that will be developed in the future will be reliant upon information technology as one of the improvement drivers. In fact, without superior information technologies, the other fronts cannot be effectively attacked. Without an integrated approach to information technology, the other fronts cannot be attacked. As will be illustrated below, the proper use of information technology spans all of the logistics fronts. The first information technology opportunity is Distribution Requirements Planning (DRP). DRP is a global planning tool to manage the total logistics pipeline. In fact, DRP causes a closer integration of the complete logistics network and, as a result, will drive savings through the total network. What DRP does is aid in planning transportation costs, warehousing requirements and inventory quantities and positions. DRP, by being global in nature, will provide a company with a global measurement of distribution.

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One of the benefits of global measurement is that companies can now centralize the buying and planning process. This will give companies greater control over their inventory. In fact, several inventory opportunities exist. A properly implemented DRP system will allow for increased inventory turns, permit quicker responses to market changes, support JIT replenishment, shrink the percentage of obsolescence and anticipate and minimize future inventory problems. All by providing a global perspective on distribution. The second information technology opportunity is Electronic Data Interchange (EDI). EDI is the electronic transfer of documents from one computer system to another computer system. The purpose that EDI serves is to act as an external information accuracy enabler. EDI takes externally produced and transmitted information and allows that information to be electronically received into the host system. EDI allows the host system to electronically send information to another external computer system. Because the transaction is free from human intervention, EDI provides a high level of assurance that the information that is being received and transmitted is accurate. Companies that wish to improve their logistics operations must invest in EDI technologies. Several factors are driving EDIs growth. Probably at the top of the list is that most retail trading partners now require EDI transactions. As a minimum requirement for doing business with a retailer, most trading partners must have the capability of providing an Advanced Shipping Notice (ASN). This document is in addition to the many documents that are sometimes required by retailers. Without the ability to provide electronic documents, a company may find itself losing business or may find itself paying stiff compliance penalties until it has EDI capabilities. An associated benefit with EDI is that it allows a company to more closely integrate itself with its trading partners. EDI is one of the foundation tools for a successful partnership. The use

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of EDI is a requirement if two companies are to become closely integrated and aligned with the same logistics goals. The second associated with EDI is that it reduces the information lead-times, and thus allows the logistics network to be more responsive to the customer needs and changing market conditions. It also reduces the transportation lead-times and order processing lead-times. The third information technology opportunity is the utilization of Warehouse Management Systems (WMS). WMSs are software packages that are concerned with meeting the two objectives of warehousing: to maximize the use of space, equipment and labor and to exceed customer expectations. The WMS accomplishes this by directing labor, providing inventory and location control and managing the flow of orders and processes in the warehouse. In essence, the WMS is concerned with managing the opportunities within the four walls of the warehouse. The use of a WMS provides many logistics benefits. The first benefit associated with WMS technology is the reduction in warehouse operating costs. A WMS will significantly improve labor productivity in the distribution center. The WMS accomplishes this in two ways. First, the WMS is always attempting to reduce the travel times associated with performing a task or series of tasks. This results in an increase in worker productivity. The second way the WMS improves labor productivity is by eliminating the unproductive or non-value added steps that a warehouse employee may perform. For example, a WMS will reduce hunt and search times as a result of the high levels of inventory accuracy that can be obtained. A WMS can minimize the opportunity for a mispick due to directed picking and putaway. By creating an environment that approaches 100 percent information accuracy, the WMS allows for the elimination of may nonvalue added steps.

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The second benefit associated with WMS technology is that it is real-time. Because it is real-time, a WMS can support a reduction in lead-times. These reductions in lead-times are for both order processing and in inventory management. This benefits in turn can support better customer service and can support a quicker turn on inventory, both of which will provide financial savings n the warehousing operations. The fourth information technology opportunity is in the utilization of a Transportation Management Systems (TMS). Today transportation management is a relationship based business. The transportation department spends the vast majority of its time answering questions, performing administrative tasks, reviewing freight bills and managing the carrier relationship. Unfortunately, these tasks leave very little time for the actual planning of the transportation process. TMS technology is meant to automate many of the administrative tasks. The subsequent result is that the transportation department is now free to actually perform some transportation planning. A transportation management systems provides for five basic functions: Freight Payment Auditing Transportation Planning Carrier Performance Trailer Loading Highway Mileage

These functions, when automated, provide significant opportunities for improvement and finally allow the transportation department to manage as opposed to reacting to transportation events and opportunities. The fifth opportunity is in order processing. The order processing window has been shrinking every year. The nature of the pull system and the need to improve the logistics

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network have both required that companies process orders more quickly. Batch order processing systems are being replaced with real-time order processing systems. The mentality has become the I want it yesterday mentality. As a result, companies that can process orders real-time, same day are gaining a competitive advantage. The challenge with real-time order processing is to first make sure that existing computer systems can support real-time processing. The second challenge is to make sure the physical distribution system can handle small order processing windows. The sixth opportunity is in electronic purchasing. Manual purchasing methods generate significant volumes of paper. This paperwork introduces the opportunity for error. More importantly, this manual paperwork adds lead-times to the logistics process. Electronic purchasing will allow for a more seamless exchange of information between trading partners and will allow for a reduction in the amount of time associated with purchasing. This subsequent reduction in time will result in a total reduction in inventory. The seventh opportunity is automatic identification technologies. Automatic identification technologies encompasses all of the technologies associated with printing and reading the bar code, including the printer technology and the radio frequency equipment. The use of these automatic identification technologies will support the highest levels of information accuracy. The question today, in fact, is not whether bar coding is justified, but rather, how to do it better. The key role point to understand with automatic identification technology is that it is an information accuracy enabler. Automatic identification technologies enable information to be accurately transmitted between all steps in the process. The need to accommodate real-time exchange of information is accomplished through real-time systems. The need for this information to be 100 percent accurate is accomplished through automatic identification.

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The opportunity bar coding presents in logistics is that it allows information to be accurately and quickly processed internally and allows external information to be processed quickly and accurate. This accuracy and timeliness further contributes to reducing the amount of time product spends in the pipeline. This high level of accuracy also aids in the reduction of non-valued added processes associated with bad information. Warehousing The warehouse plays a critical role in supporting a companys logistics efforts. If the warehouse cannot process orders quickly, effectively and accurately, then a companys logistics efforts are going to suffer. Information technology, as previously discussed, will certainly play a significant role in making our warehousing operations more effective. Physical distribution opportunities, though, still play a significant role in affecting logistics excellence. All the best information system will be of little use if the physical systems necessary to get the products out the door are constrained, misapplied or outdated. All of the opportunities listed below will allow the warehouse to more effectively process and ship orders. The first warehousing logistics opportunity is in improving the order picking operations. Orderpicking has traditionally been the warehousing operation where a company has spent most of its time and money. Orderpicking has also been the operation where companies will misspend capital dollars in hopes of improving orderpicking productivity. Successful orderpicking is critical to a warehouses success. Trends in logistics today are driving warehousing to develop better orderpicking solutions. The trend in industry is towards more SKUs and more frequent deliveries of orders to our customers. All of this is part of the quest to provide superior customer service. By allowing customers to order more frequently and providing customers with greater variety, the warehouse is encouraging smaller orders and fewer units per line. This in turn results in more total lines

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being picked in the warehouse. More SKUs encourage a customer to increase the variety of product that they order. This in turn results in more lines per order. In either case, the warehouse is picking more line items per unit. A second trend that is occurring is that warehouses are being asked to presort or prelabel selected orders. This presorting and prelabeling process further complicates the orderpicking process by adding additional steps to the process. The warehouse must now perform some of the activities that might traditionally have been performed in the customers warehouse. This trend is likely to continue as it will streamline the receiving process in the customers warehouse and support crossdocking opportunities in the customers warehouse. The prelabeling and presorting of orders is just another step in the customers desire to reduce handling in their distribution center. Both of these trends require that the orderpicking process be carefully designed and improved to support the timely processing of orders. In many cases, companies must improve their orderpicking operations to stay even in the productivity race. This is leading to more investments in conveyorized solutions and automated material handling and storage solutions. And in many cases, the investment in automation is being made to increase the flow through capacity of the warehouse and not necessarily to reduce labor costs or improve productivity. If the product cannot get out the door in a timely manner, there will be no need to worry about orderpicking. There will be no warehouse. The second warehousing opportunity is in crossdocking. Crossdocking is not a new opportunity, but the way in which companies are utilizing crossdocking is new. Crossdocking has traditionally been used to augment backorder fulfillment. If there was an open backorder for the product when it arrived, it would not be stored. It would be moved across the dock area and

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readied for outbound shipping. Today crossdocking is being identified as a strategic warehousing opportunity. Crossdocking can occur at the manufacturer, distributor, retailer and transportation carrier level. Each participant has different requirements depending on whether the participant is shipping the goods to be crossdocked or whether the participant is preparing to receive crossdocked goods. The receiver typically is requesting that the crossdocked goods be sorted and prelabeled. In order to meet these requirements, the shipper must perform a more detailed picking process. If 100 items are ordered, not only must the warehouse pick the 100 items, but the warehouse must also separate those 100 items for the different store orders. The first benefit associated with crossdocking is that it speeds up the receiving process. This allows the receiving warehouse to more quickly flow the inbound product, and thus turn the product around in a shorter period of time. The product is coming in prelabeled and presorted. The receiving warehouse does not have to spend the time preparing the product for out bound shipment. The second benefit associated with crossdocking is that it can reduce the amount of material handling that goes on in the receiving warehouse. Product is not stored, it is merely moved across the staging area. This will reduce both storage requirements and the total time that is spent moving product into and out of the storage area. The third warehousing opportunity is in productivity. In the past, productivity has meant, do it faster with less people. The first objective of warehousing has always been to maximize space, equipment and labor. This objective implies that productivity is not just labor, but also space and equipment. Of course, productivity is something that must be measured and understood. Productivity, though, is not just labor performance, but a combination of factors that all contribute to increased productivity.

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The logistics opportunity that exists is to both truly understand productivity and be able to effectively measure productivity. To understand productivity, one must understand that productivity is not merely how many cases per hour a person receives, how quickly that information is entered into the systems, how accurate the receiving process is and what is done with this information. Because this productivity information can be collected through the companys information system, it is possible to create a more realistic picture of total productivity. Once this information is understood, it is possible to then better meet the objectives of warehousing. The fourth warehousing opportunity is in space utilization. Companies are now starting to realize that improper space utilization can result in severe productivity penalties. The old rule of thumb has always been that when a warehouse was more than 80 percent full, more space was needed. This rule is based on the fact that when a warehouse gets more than 80 percent full, it takes longer to put something away, and as the time to find a storage location increases, the proper slotting of product starts to disappear. Slow moving items are stored in fast moving locations and fast moving items must be stored in slow moving locations. The end result is that any informal ABC storage plan that might have existed has disappeared. Productivity begins to decline. Damage begins to increase, mispicks rise and obsolescence starts to increase. All as a result of poor space utilization. The benefit to tracking space utilization is that the warehouse is able to anticipate when the warehouse will become too full, and the warehouse will be able to understand the impact excess space utilization has on labor productivity. This will allow the warehouse to plan better and to understand when outside storage should be employed and when additional space needs to be built. This information will allow the warehouse to be more productive.

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The fifth warehousing opportunity is in value-added services. Warehouses are no longer being thought of as the place that merely picks the carton and ships it out. At every level in the distribution network the customer is asking the vendor to perform some value-added service to facilitate more efficient operations in the receiving warehouse. Whether it be pre-sorted and prelabeled goods for eventually crossdocking or the actual customization of the outbound product, the customer is becoming more and more demanding. Providing value-added services are now becoming a logistics requirement. Specific value-added service being provided today including pre-ticketing and marking for retailers, small assembly operations, customer specific packaging customization and presorting for the customer. The list goes on and on. An activity is a candidate for being a value-added service if the performing of that activity by the vendor will save time in the customers receiving, putaway, picking or shipping operation. The dilemma that must be avoided is that the value-added service is merely a shifting of costs without proper compensation being given to the vendor providing the service. The providing of value-added service must be a win/win situation. Of course, this is not always the case. In some instances, the value-added service that must be performed becomes a requirement for doing business with a specific customer. In that case, other productivity savings must be uncovered in the warehouse to support the increased costs associated with the value-added service. The benefit to providing value-added services to your customer is that these value added services will help you develop a stronger partnership with your customer. Your customer will rely on you to provide these services. This reliance will result in long-term relationships that can only be good for your business.

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Conclusion Logistics excellence can only be had by understanding all of the logistics fronts. Distribution, information technologies, transportation and warehousing issues must all be considered when evaluating opportunities to streamline the logistic process.

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