Supply Chain Transformation for Retailers and Wholesalers

Supply Chain Transformation for Retailers and Wholesalers

Dematic Corp.507 Plymouth Ave. NEGrand Rapids, MI 49505

Tel: (616) 913-7700Fax: (616) [email protected]

white paper


Introduction

The challenge is clear, the technology is here...

This white paper identifies and examines opportunities related to technology driven changes oc-curing in Supply Chain Management. The overarching thesis is that information and leading edge mechatronics technology, process improvements and automation have begun to drive a major transformation in the way retail and wholesale business operations are best designed and con-ducted. This business transformation quietly began during the 1990’s and will continue into the foreseeable future. Business leaders face the challenge of “re-inventing” their business opera-tions to achieve performance levels essential to meeting and exceeding the raising expectations of their customers. Even at this early stage of this business transformation journey it’s clear that supply chain structure, strategy and best practice is being profoundly impacted. On the following pages, several challenges for supply chain management change are identified, and related op-portunities for improved performance are highlighted. Depending upon a specific firm’s sensitivity and capability to exploit these challenges, the results may be viewed as competitive break-through opportunities or as serious future customer and operational pain points. In any event the discussion that follows hopefully offers a heads-up to executive leadership, because all capabili-ties discussed can be supported by currently available processes and technology.

Dematic I Supply Chain Transformation for Retailers and Wholesalers2


Operational Excellence

The phrase the “customer is king” has been given lip service forever by business executives. However, the degree to which supply chain operational policies and practices have been estab-lished to fully please “the king” is questionable. 21st century business operations are and in-creasingly will become all about responsiveness. Facing a growing intolerance to “broken prom-ises”, manufacturers and wholesalers are embracing six sigma initiatives in an effort to make the traditional objective of perfect order performance a reality. Retailers are facing the brutal truth that consumers no longer have patience or the time to shop out-of-stock stores. For example, it has long been a fact that the low point of product availability in a typical retail food store is near perfectly correlated to the time of highest consumer shopping. Stores experience the greatest out-of-stocks during the period of greatest shopper intensity. Retail Senior Management is no longer willing to tolerate inferior performance from its own supply chain or those of their suppli-ers. Stock outs have a negative impact on sales, inventory turns, profits, and most importantly, customer loyalty.

In short, supply chain performance has not met expectations pursuing traditional inventory man-agement and forecasting practices. What is developing is an array of initiatives aimed at increas-ing supply chain responsiveness to meet or exceed consumer purchase preferences. These initiatives to increase responsiveness will continue to gain popularity. Three major opportunities exist: New Store Replenishment Strategies, Demand Based Replenishment, and Advanced Order Fulfillment Systems will support operational excellence in the supply chain.

Store Replenishment StrategiesFor the retail supply chain, it is all about serving the retail store. Processes that speed up and optimize the replenishment cycle should be considered for implementation. Scheduling deliveries more often will minimize stock outs, but this means smaller order sizes and that often includes split cases order fulfillment. Split case or broken case order fulfillment is more complex and labor intensive than full case picking and therefore should be carefully orchestrated and controlled. Light and voice directed picking systems integrated with conveying and sorting automation will bring speed, accuracy, productivity and cost effectiveness to this process.

For some retailers, a network strategy may be deployed that utilizes smaller and more regional distribution centers. With a regional distribution center network, the average distance to each store is diminished; smaller size deliveries can be provided daily to every store since transporta-tion distances are significantly reduced. For other business models, fewer or more centralized distribution centers may provide the best service to stores. A centralized distribution will al-low high levels of material handling automation to be justified, allowing fast and accurate order fulfillment, reduced inventory costs and reduced labor costs. No “one solution” works for every retailer or wholesaler. Parameters that will impact the strategy include: number, value, and vari-ety of SKUs, mix of slow movers verses fast movers, number of stores and the amount of value added services that are required.



Operational Excellence (Cont.)

Demand Based ReplenishmentToo often, reliance on sales forecasts has supply chains unable to respond to actual demand. Too much of the wrong products and not enough of the right ones means excessive inventory and stock outs for retailers. After all, supply chain management is centered at the crossroads of Supply and Demand. Changing market demands are difficult to anticipate or forecast and there is some “art” in the science of replenishment management.

Traditionally, inventory was pushed to the stores without a full understanding of customer de-mand. Simple projections too often led some buying activity to go astray, and forecasts were made too far in advance. However, today’s demand planning software can dramatically improve forecasting accuracy. Detailed transaction data such as: item correlation, number of items pur-chased in a transaction, shopping frequency, and price elasticity allows the examination of buying behaviors that better predict future demand. However, some companies have concentrat-ed their efforts on process improvements in “demand chain” management, instead of software. By re-engineering the demand signals with all the fluctuations that flow back through the supply chain and by streamlining the forecast cycle time, vast improvements have been realized. It is all about tight synchronization and working backwards from the customer.If a switch to demand based replenishment from a forecasted push model is deployed, then the entire strategy is based on the transaction at store check-out. This is where strategies such as“scan based trading” can provide retailers and suppliers with the immediate information required to deploy demand based replenishment. Scan based trading allows close coopera-tion between retailers and suppliers since the supplier is not paid until the product is sold. Sales information is immediately transmitted to the supplier allowing highly granular sales data such as the time of the transaction, location, quantity per sales transaction, etc. Once the demand based replenishment process starts, it is all up to the speed and efficiency of the order fulfillment process to rapidly restock before a stock out occurs.

Advanced Order Fulfillment SystemsThe wide variety of innovative order fulfillment solutions means the “perfect order” is within reach. The perfect order is: the right product, at the right time and filled utilizing a highly efficient meth-od. Supply chains that have operational excellence employ savvy fulfillment systems. The order fulfillment process is the most complex subsystem in the distribution center or warehouse and is therefore worthy of continuous analysis, attention and investment in efficiency/accuracy produc-ing methods. Configurations that include pick & pass or zone routing conveyor networks, goods to the person technology, voice and light directed technology along with some level of automated sortation will streamline, accelerate and control the process at the levels required to create a competitive advantage. All of this automation is orchestrated with modular execution software in many forms, such as WCS (warehouse control systems) and WMS (warehouse management systems).



Inventory Management

Supply chain strategists that are responsible for inventory management must deal with a wide variety of changing conditions, each with the possibility of threatening successful deployment of inventory. A primary concern is the constant growth of SKUs as well as how to accommodate changing SKUs. Another challenge is slow moving SKUs and their associated cost as it relates to poor inventory turns. Some strategies and considerations for inventory managers include: Late Customization, SKU Rationalization, DC for Slow Movers & Dynamic Slotting.

Late Customization Late customization is the modification of product configuration, presentation and the perfor-mance of value added services to meet exacting customer expectations. Late customization uses demand driven product deployment as a means to increase supply chain flexibility and ac-commodate volume fluctuations. Late customization is also commonly referred to as Postpone-ment and Mass Customization. The concept is not new. What is new is the availability of infor-mation technology capable of capturing and sharing developing demand trends. In higher value merchandise, advanced manufacturing techniques are facilitating customized build-to-order and delivery almost as fast as a consumer can purchase an item at a retail store and arrange for local delivery. Dell Computers has perfected build-to-order as a primary channel for selling its products direct to consumers. Whirlpool is experimenting with “Take and Order—Promise a Delivery” for custom assortments of appliances.

SKU RationalizationSKU Rationalization refers to the need to meet consumer choice expectations while controlling the number of items stocked. Consumers desire choices - as tastes and preferences rapidly change. For supply chain performance the continual proliferation of new products or SKU’s is pushing capacity as well as diluting operational velocity. Product life cycles are getting shorter and SKU phase-outs more expensive. This potential pain point drives costs up without cor-responding increases in revenue. Lean launch capabilities are essential to reduce strain of new product introduction on overall supply chain exposure and risk. Rigid criteria concerning the task of weeding out marginal performers from product assortments is necessary for sustainable sup-ply chain efficiency.

SKU rationalization can also support a brand alignment strategy. By offering only certain brands, retailers can benefit from a certain association with a particular brand. Also, supply chain strate-gists should edit SKU offerings for consumer convenience. The retailers can make the analysis for the consumer and offer only the brands most appropriate for the customer base. SKU rationalization will in turn increase the efficiency of the supply chain as well as increase profitabil-ity.Another inventory management trend that is worthy of consideration involves the reduction of in-ventory located at the store. By reducing inventory levels at each store, significant inventory cost reductions can be realized. Typically, store managers have insisted on “safety stock”, and often



Inventory Management (Cont.)

do not realize the huge cost impact of this methodology, especially when multiplied over the number of stores in a chain. However, with a finely tuned distribution operation behind each retail store, this strategy can be deployed without increased risk of “stock outs”. Automated fulfillment operations, combined with newer versions of order management software, WCS and WMS soft-ware and the emerging RFID technology will support absolute minimum inventory at the store.Other factors should be considered when implementing an inventory strategy and determining inventory levels are lead times from suppliers, profit contribution for each SKU, replenishment costs by SKU, and transportation costs.

Slow Movers DC & Dynamic SlottingSlow moving SKUs present issues that slow down supply chain performance. One method that addresses this situation involves the implementation of a specialized distribution center that accommodates slow moving SKUs for a retail chain. For example, a distribution network with 7 distribution centers could move slow moving inventory from the 7 distribution centers into one, resulting in the remaining six distribution centers with medium and fast movers only. By placing entire slow moving inventory into one central distribution center, throughput rates per SKU now increase enough to deploy automation technology and justify, for example, the cost and space for a pick face for each SKU. Throughput rates and labor costs are some of the key justifiers for systemized automation such as conveying/sorting, paperless picking, and automated storage systems. Meanwhile, the remaining 6 distribution centers in the network gain efficiencies by only dealing with medium to fast moving inventory.

Dynamic slotting is a technique that places slow moving inventory into an automated storage system thereby creating high density/efficient product storage without a dedicated pick face for each slow moving SKU. WCS software directs the storage system to “serve up” the SKU to a pick face. When order fulfillment is complete, the automated storage system places that SKU back into high density storage, thereby utilizing a “dynamic slotting” solution.


DC Optimization

The distribution center represents a complex multitude of processes and activities. An objective for an effective distribution operation is to reduce or remove inefficient activities. It is important to realize the number of “touches” to the merchandise must be minimized. Each “touch” incurs costs, slows the process and opens the possibility of creating errors or incurring product dam-age. Furthermore, the distribution center is under pressure to accommodate more throughput capacity and serve more stores without adding more mechanization or space. Often referred to as “sweating the assets”, today’s distribution center needs to become high performance throughput machines. A few examples of methods that provide increased distribution center optimization include: Cross-docking, Slotting Techniques and Integrated Execution Software.Cross-dockingThe promise of cross-docking has eluded most operations. What is available today includes


DC Optimization (Cont.)

more opportunities to take advantage of the technique. Supply chain visibility software, increased connectivity with suppliers, broader use of advanced shipping notices (ASNs) and automated conveying/sorting systems have all contributed to make cross-docking a more optimal operat-ing operating method than ever before. Cross-docking is the ultimate dream of any distribution center, since the inventory keeps moving and the high cost of order fulfillment subsystems are minimized. Whatever comes in each day, get processed and ships to the stores by the next day and more often, the same day. Furthermore, the longer products sit in a warehouse, the more there is potential for shrinkage or damage. Cross-docking’s greatest advantage is labor savings. The labor cost per carton has the potential to drop dramatically. One retailer’s cost of handling a carton went from $1.40 per carton to $.14 per carton when cross-docking and ASNs were implemented. In addition, cross-docking has proven to take time out of supply chain operations. Finally, cross-docking has been known to increase store replenishment accuracy. In more and more distribution centers, cross-docking represents a growing percentage of the volume that passes in and out of its doors.

Slotting TechniquesSlotting, the determination of how the SKU pick faces are configured, has been pushed into a refined science of its own. Today, advanced slotting software is available that provides precise slotting for pick faces optimization and efficiency. Slotting experts will tell you, “slot it and re-slot it and then re-slot it again”. The best distribution centers continuously re-slot: more often is better.

Integrated Execution SoftwareThe best way to get more performance out of a distribution center is to implement execution software that optimizes the routing and strategic control of material flow. The WCS optimizes the control and performance of an automated system by maximizing material flow, executing efficient storage strategies, and by providing accuracy in order fulfillment and sorting. Meanwhile, the WMS provides the backbone that runs the overall distribution operation. The WMS manages the order processing, receiving, put-away and shipping functions in a cohesive, integrated method-ology. Without a comprehensive WMS, distribution centers and warehouses would incur tre-mendous labor and asset management costs. However, the WMS does not optimize and direct material flow on conveying/sorting technology, it does not determine the ideal location to store an item within an automated storage system, nor does it manage the precise details of light and voice directed order fulfillment. To get the most performance out of these automated subsys-tems, a WCS is required.

Wave management, the logic within the WCS or WMS that controls the processing of orders through a distribution center, is vital for distribution optimization. A properly executed wave man-agement strategy will decrease order fulfillment time, boost productivity, and lower operational costs. Wave management is all about balancing and optimizing the work presented to the distri-bution center to perform: proper mix of small and large orders in a ware, # of expected cartons, # of diverts off the sorter, etc. For example, good wave management will match “order ready to ship” with “trailer ready to ship” time.



The Impact of Labor

The labor factor in the supply chain is often viewed as a potential area for reduction. While labor costs are significant, too often the decision is made to move jobs to low cost countries. Upon further analysis, the impact of labor reduction/efficiency can be successfully accom-modated by improving the work environment and optimizing the output of the worker with blends of automation.

The issues are significant, however. Salaries, medical costs and benefits are just the start. Other areas that must be considered are: labor quality, skills, turnover, litigation of workman’s compensation, theft, safety and the attitude of workers. Giving the right tools, processes, and technology, the working staff can be made to be more productive and comfortable in the production and distribution operations within the supply chain.

At receiving, trailer unloader technology assists workers to unload trucks. Ergonomic sub-systems assist workers with pallet stripping. ASRS (automated storage and retrieval systems) are utilized for storage of loads in coolers and freezers thereby minimizing worker exertion and exposure to harsh environments. In the area of order fulfillment, light and voice directed systems improve worker comfort and ergonomics. Lifts, fork trucks, conveyor and sortation systems move product through the distribution center or warehouse eliminating the manual lifting, pushing and pulling of product by workers. At the shipping dock, trailer loaders assist workers to load the trucks. All of this technology and more reduces injuries and resulting workman’s compensation claims.

Technology solutions bring immediate benefits to the work environment. With proper utiliza-tion of specific automation, focused strategies can be deployed to make the workplace envi-ronment safer and more comfortable, thereby minimizing disgruntled attitudes and employee - turnover. Furthermore, with high speed, intelligent conveying and sorting systems, the throughput required can in many cases be accommodate in less time of current operation (single shift vs multiple shifts). First shift operations are more desirable for workers and will attract a higher quality workforce. In addition to mechanized automation, labor optimiza-tion software can improve the deployment of the working staff, thus further maximizing the productivity of each worker.


Store Shipments

One element of the supply chain that needs more attention is the “last 30 yards” to the store shelf. This is where the affects of supply chain silos have negatively impacted performance. In the past, distribution center operations were rewarded for getting the products out the door fast and efficiently without enough regard to what happens at the store. Making store shipments “more friendly” may add some costs at the distribution center, but the overall supply chain will operate more effectively, resulting in a lower “landed cost”. This compromises store labor for back room activity instead of serving the customer on the retail floor. Also, truck dwell time is too long,


Store Shipments (Cont.)

and the number of store deliveries a truck can make. There are two methods to improve these issues: Store Ready Loads and Load Configuration Management.

Store Ready LoadsThe logic and planning tools provided in the execution software at the distribution center can accommodate strategic order fulfillment such that merchandise is routed to the truck in a more store friendly configuration. Loads can be picking and packed to match the store Plano-gram. Loads can be arranged by department, zone, family grouping, aisle, or shelf. This strategy accommodates productive store replenishment activities.

Load Configuration ManagementTo reduce the dwell time of the delivery truck, new alternatives can be put in play, such as “roll carts”. Roll carts, can be quickly unloaded at the stores, dramatically improving truck - turn-around time. This allows the trucks to make more deliveries and reduces labor utilization at the store to unload. Furthermore, roll cart technology simplifies the process of shelf re-stocking. The drawbacks include returning the roll carts to the distribution center and cart maintenance.

Other strategies for improved load configuration management include smaller loads deliverer more frequently, thereby simplifying the restocking process and reducing the potential for stock outs. A strategy that is gaining momentum is the configuration of mixed pallet loads. Instead of shipping a pallet of any one SKU, mixed pallets are built that contain many SKUs. This process typically involves the utilization of robots and software to build the pallet in a configuration friendly to the store and/or route delivery. Pallet loads can be arranged such that each layer is a differ-ent SKU or the pallet could be built such that different SKUs are contained in a layer. Either way, mixed pallet building provides huge logistics benefits; the robotic and software automation has become stable and offers a viable return on investment.



Supply Chain Extension

Perhaps the area of greatest supply chain innovation and change has been the potential of using information technology to extend supply chain relationships. To meet the rising expectations of consumers, supply chain operatives have begun to recognize the importance of sharing informa-tion and participating in collaborative planning. The benefits realized with increased supply chain extension include: Reduced inventory costs, reduced freight costs, reduction in accounting/invoice discrepancies, fewer incidences of “out of stock” and overall improved data integrity.

It is already clear that the traditional role of retailers and manufacturers has been permanently altered. Retailers are increasingly gaining power in the supply chain as a result of their position-ing and presence in markets where consumers live and shop. This local proximity to and loyalty of consumers has increased retailer power to demand and receive concessions from traditional manufacturers. Many large scale retailers have so called “house brands” that enjoy distribution volumes greater than some manufacturer’s so called “national brands”. As a result of consumer store loyalty and house brand acceptance, retailers command and benefit from local presence dominance. Manufacturers, in contrast have become increasingly global in scope looking toward international distribution to provide growth opportunities. This shift in relationships has driven a growing reorganization of the supply chain. Increased Collaboration and Connectivity is essential to assuring continuous efficiency improvement. The answer has been partly found in deployment of technology that increases connectivity, the development of collaborative initiatives and over-coming the challenges of Data Synchronization.

ConnectivityLinking supply chain members in a way that increases overall visibility and coordinated perfor-mance. Driven by shared information and jointly developed plans, members of an integrated sup-ply chain increasing have access to historical and strategic information concerning sales, inven-tory, shipment status and promotion plans. Such shared information, accessible on a real time basis from all vantage points throughout the supply chain, is supported by shared commitment and access to common dashboard status displays. The potential to increase the extent and qual-ity of connectivity will increase as RFID gains widespread adoption.

CollaborationThe joint use of market and operational intelligence to drive performance. Collaborative initiatives continue to grow in scope and strategic importance. The grocery industry, through the joint efforts of Grocery Manufacturers of America (GMA) the Food Marketing Institute (FMI) and the Voluntary Inter-industry Communications Standards (VICS) have developed and endorsed a modified frame-work for Collaborative Planning, Forecasting and Replenishment (CPFR). Similar initiatives have been endorsed by other powerful organizations such as the Retail Industry Leaders Association (RILA) and the International Automotive Logistics Association. Collaborative initiatives have gone far beyond information sharing to incorporate joint plans and syntheses of retail feedback to man-ufacturers. Such collaborations set the foundation for joint management of inventories throughout



Supply Chain Extension (Cont.)

the supply chain which far exceed the early visions of Vendor Managed Inventories (VMI). The weak point in the overall collaborative process is the willingness of participants to share risks and rewards. Real time connectivity of trading partners will continue to improve capabilities to engage in risk/reward based collaborations.

Retailers need to leverage the expertise of their suppliers. If retailers fully partner with suppliers, activities such as demand planning can be much more optimized. If a supplier that has actual demand data for a new product previously introduced in another geographical market, that knowledge could be utilized to shape the retailer’s demand forecast. Furthermore, the retailer should have more insight into the supplier’s manufacturing capacity so the retailer does not over stimulate the market with advertising or promotion.Data SynchronizationData Synchronization is the capability to share meaningful information fast and inexpensively. The goal of data synchronization is to close the information loop between the customer and the up-stream operations of product design, production, and distribution as quickly and directly as pos-sible. Companies should be willing to invest in activities, methods, and technologies that increase data synchronization, and thus the velocity and responsiveness of the supply chain. The capability to synchronize data is at the heart of supply chain connectivity. To synchronize data means collection and exchange standards must be developed and implemented. Many managers feel that the integration of Universal Product Codes (UPC), Electronic Product Codes (EPC) and related exchange standards remains the Achilles Heel of achieving Global Data Syn-chronization. Initiatives like RFID will increase date granularization and thereby introduce even a greater need for local data process consolidation, or what is increasingly being called “edge computing”. Sharing all strategic data increases the opportunity to improve supply chain visibility as the challenge to simplify data exchange is realized. The challenge is to avoid data chaos by achieving synchronization.


Full Service Pricing

A major challenge in Supply Chain Management is to reduce operating complexity. In order to grow efficiently it is imperative that the complexity involved in completing a traditional transaction be reduced. Today’s standard method of pricing and invoicing offers an opportunity to simplify trading partner’s transactions. Under existing practices, products are sold on either a pickup or delivered basis depending upon the time, quantity and available transport capacity. Allowances are typically provided if and when the buying organization arranges merchandise pickup. These allowances vary according to purchase time and situation. Many current day pricing and invoic-ing practices have evolved over many years without the benefit of planning. Most current price administration practice was developed and implemented prior to the advent of modern day technology. In almost all industries pricing practices need to be revisited.


Full Service Pricing (Cont.)

At least three concepts, all legal within today’s regulatory structure and feasible given available technology, need to be given careful consideration as means to reduce complexity: Dead Net Pricing; Full Value Pricing; and Uniform Pricing all represent the use of information technology to decrease transactional complexity.

Dead Net PricingThe use of a single charge for the ownership transfer of a product including related services. Us-ing dead net pricing principles, all discounts related to volume of purchase and time of payment are built into a single price. Typical dead net pricing is agreed to by trading partners who are en-gaged in a continuous transactional relationship. The dead net price may incorporate provisions for return allowances, over, short and damage allowances and incentives for such efficiency ini-tiatives as quick unload and equipment turn around. The objective of dead net pricing is reduced complexity to encourage greater trading partner connectivity.

Full Value PricingBuilding all value added features into a single price. Whereas dead net pricing was a concept designed to simplify the timing and discount related to pricing, full value pricing, sometimes called menu pricing also seeks simplicity. For example, a particular supplier may be willing to develop store ready unit loads, such as pallets or containers, for a retailer. These store ready configurations allow retailers to move product direct to stores thereby avoiding many costs typi-cally associated with warehousing. Another example may be the packing of modified or cus-tomer specific case sizes. Case size customization to the specific needs of the retail customer can reduce the costly practice of splitting case quantities at the retailer’s distribution center. The objective of full value pricing is for customers to identify value added services from the menu and for suppliers to perform them as part of the transaction. This pricing practice reduces complex-ity and eliminates the need to incorporate up-charges for value added services on a transaction specific basis.

Uniform PricingMaintaining price stability across time. The practice of uniform pricing has at least two dimen-sions that could profoundly reduce supply chain complexity and increase efficiency. The first dimension is to significantly modify or eliminate end of quarter price incentives designed to load the trade and thereby spike quarterly sales. As one student in a Supply Chain Class once asked when reviewing sales history “do people really eat that much more cereal at the end of every quarter”. This long term practice of price dealing at quarter end creates operational volume spikes, complexity and significant supply chain cost. Uniform pricing facilitates the smoothing of volume by avoiding peaks and valleys and serves to reduce the overall cost of supply chain operations. Buyers learn to anticipate when price discounts will be offered to encourage quantity purchases and/or price increases will be implemented. Based on experience they tend to plan purchases to take advantage of anticipated price incentives thereby creating otherwise avoid-able peak and valley supply chain volume spikes. While difficult to implement, uniform pricing will stabilize supply chain operations and result in significant operational benefits without sacrificing long term profitability.



Full Service Pricing (Cont.)

stabilize supply chain operations and result in significant operational benefits without sacrificing long term profitability.

A second aspect of uniform pricing is increased opportunity to keep trade channels stocked with fresh inventory. The overall benefit of uniform pricing across time is the rationalization of supply chain performance. Uniform pricing serves to reduce long established practices of forward buy and diverting. Regulatory Agencies are taking a far more aggressive approach to require consis-tency concerning when a shipment is treated as a legal shipment and when a customer order is booked as a legal commitment. Standardized treatment of shipments and orders at the end of quarter is coming under increasing scrutiny with respect to compliance to Section 404 of the Sarbaine-Oxley Act (SOX). The prevailing pricing practice also has ramifications for transportation integration and reverse logistics flow discussed below.


Transportation Integration

Transportation represents the highest single cost of supply chain logistics accounting for over 60 percent of the total logistics cost. Beyond cost, supply chain operations confront a serious shortage of transportation capacity. Most operations safeguard against the potential operational discontinuity by maintaining inventory safety stocks. All of the above is being exasperated by the high cost of fuel which is resulting in significant surcharges, enforcement of newly enacted hours of driver service laws and international border crossing constraints. Carriers and ship-pers alike are looking to new technology to both improve transport efficiency and effectiveness. Working together three traditional ways to increase transport efficiency are gaining popularity: Increased Visibility; Closed Loop Planning, Multi-Shipper Consolidation, Customer Paid Distribu-tion Costs, Transportation Network Optimization, and Pool Points.

Increased VisibilityThe capability to retain positive tracking throughout the time a shipment is in transit. Carriers provide the transport linkage that creates inventory, time and place values. The technology of today’s supply chain operations permits full visibility or electronic surveillance of a shipment. The old practice of estimating time of arrival (ETA) has been replaced with tracking capabilities that provide continuous location and absolute time of arrival (ATA). This technology increasingly can be deployed to fully utilize transport capacity by assuring dock availability at shipment arrival, quick unloading and increased efficiency in yard management. The goal is simple—increased ef-ficiency as a result of improved utilization of available and committed rolling stock.

Closed Loop PlanningStart to end equipment routing to maximize asset utilization. Routing has long been a major as-pect of transport operations. Routing effectiveness is benefiting from improved information tech-nology. Currently available technology can maintain real time status to improve the process of


Transportation Integration (Cont.)

matching equipment supply to shipment demand. The range of capabilities span from improved Transportation Management Systems (TMS) to online market places that match equipment sup-ply and demand on a real time or on-demand basis. The objective is to maximize usage of trans-portation lanes in the backhaul end of the distribution cycle. This reduces transport deadhead miles and more fully utilizes available capacity. Closed loop planning encompasses a wide variety of techniques designed to improve utilization. It involves coordination among a network of ship-pers and carriers to jointly plan activities to increase the roundtrip likelihood of fully utilized carrier capacity. Whereas an open electronic market place may increase the potential of matching loads and capacity, closed looped planning designs a shipment pattern to assure the timing and flow of movements in real time are matched.

One technique to utilize more closed loop planning, is to evaluate the use of an internal private truck fleet vs. a manufacturer’s contracted carrier. Trucks that complete store deliveries may pick up a new load from a supplier and then return to the distribution center, thus minimizing empty mileage. For this transportation service, the supplier credits the retailer with an allowance. This methodology requires the supplier to “unbundled” the transportation costs, unloading charges, etc. that may be baked into the product cost. What this method requires is a lane by lane analysis of transportation costs so that the most optimum transportation cost could be obtained. There are some lanes that the suppliers can provide more efficiently, whereas there are other lanes that the retailer can provide more effectively.

Multi-Shipper ConsolidationThe joint shipment of two or more shippers products. A common aspect of distribution is that several shippers often make simultaneous shipments to the same customers that do not fully utilize transport equipment capacity. A traditional practice among companies is to consolidate shipments to multiple customers on a single truck. The delivery process is to “peddle” shipments to different customers following a route configuration designed to most efficiently complete overall customer delivery. For example, a given truck will make stops at a preplanned sequence of customers. This permits the truck to commence deliveries fully loaded and to make deliveries until all shipments are complete. Many commercial carriers have special pricing tariffs to facilitate multi-stop deliveries. Once again new technology is creating improved opportunities. The notion of multiple shippers collaborating to build a full shipment to a customer they jointly service is gaining popularity. The efficiency is that one full trailer is received by their joint customer that is fully loaded versus multiple less than truckload deliveries from multiple suppliers. The result is reduced receiving dock congestion and increased utilization of transport capacity. Full trailers shipped direct to customer destinations reduce the frequency of partially loaded miles charac-teristic of peddle operators. To facilitate multi-vender consolidation many supply chain operators are utilizing the services of third or forth party logistics service providers in a consolidation facility format.



Transportation Integration (Cont.)

Customer Paid Transportation CostsIf a supplier is responsible for transportation, that means the supplier selects the carrier and as-sumes the risk of the shipment until it is received by the customer. By moving toward a customer paid transportation method, the customer saves the mark up that the supplier adds to the carrier costs, gains more visibility during transport, and allows consolidation to one or fewer carriers to obtain the best rates. For the supplier, it means that there is no risk during shipment, no adminis-tration cost for maintaining freight claims for losses or damage, and it enables earlier collection of payment.

Transportation Network OptimizationAs distribution centers managers are encouraged to re-slot the pick faces, transportation man-agers should re-map the transportation network on regular intervals. By mapping the distribution center locations with supplier locations and store locations (or customer locations), opportunities to decrease costs can be revealed. As the velocity of flow changes, and suppliers change, the transportation network may need adjustment for increased optimization.

Pool PointsFor operations that utilize crossdocking, additional transportation optimization can be obtained with the use of Pool Points. Pool Points are regional location points where freight is “pooled” for more efficient transportation to a destination. To un-complicate the crossdock operation, prod-uct is conveyed and sorted through the distribution center and loaded onto truck by region but without any regard to route delivery or store friendly delivery. By doing a simple flow through, buf-fer storage is not required in the distribution center, and transportation scheduling is simplified. To obtain an ideal truck loading sequence, the truck trailer transports the load to a regional Pool Point, where the truck is unloaded and then re-loaded in an optimized sequence and consoli-dated with other loads destined for delivery in that region.


Life Cycle Support

An area of supply chain connectivity gaining visibility is the post-transacted importance of cus-tomer service and support. It is a fact that modern supply chain operations play a vital role in maintaining viable customer relationships. Firms that manufacturer or process goods have a re-sponsibility to assure their products perform as committed and meet all related quality and safety expectations. Life cycle support is closely related to the next topic, Security. However, each is handled separately because of their growing importance to supply chain execution. From a Life Cycle Support perspective at least three aspects of supply chain performance offer improvement opportunities: Reverse Logistics; Repair, Replacement and Maintenance; and Reclamation.


Life Cycle Support (Cont.)

Reverse LogisticsThe movement of return merchandise from customers back to suppliers. A wide variety of events can stimulate the need for reverse product movement in a supply chain. Among the most com-mon are expiration dates, damage, recalls, overstocks, and new product failures. Regardless of the cause, reverse movements run counter to the normal design capabilities of a supply chain. To experience the full dynamics of reverse logistics one need only observe an undeliverable retail store merchandise shipment returning to a distribution warehouse for restocking. Products that originally were handled with extreme efficiency in unit loads during order selection and shipment return to the distribution warehouse as an undisciplined array of single cases almost defiant of any handling efficiency or unitization. The reverse logistics challenge is of sufficient magnitude that many firms engaged in mass distribution use specialized facilities or 3PL logistics service firms to perform this essential aspect of operations.

Repair, Replacement and MaintenanceThe process of supporting product life cycles. The range of Maintenance Repair Operations (MRO) related activities is of sufficient magnitude to almost defy generalization. However, the challenge is real and important for supply chain operations. Many firms make significant profits in supporting equipment once the original product is sold. In some cases, almost all profits derive from the sale of supplies. In other situations the value of the product being distributed is sufficient to justify recycling. Fully exploiting the challenges and profitable opportunities of recycling scarce or expensive parts and supplies is critical to many firm’s value propositions. The important point is that almost all repairs, replacement and maintenance activities involve reverse logistics move-ments.

ReclamationThe disposal of returned merchandise. In final analysis one firm’s junk is another firm’s gold. It is clear that Supply Chain Executives no longer overlook the value that can be generated through disposal. Many firms are engaging the services of 3PL’s who specialize in the marketing of re-turned goods. The value generated from selling merchandise and components can be significant part of operating profits. The use of electronic marketplaces for disposal of returned goods is becoming common.



Supply Chain Risks and Regulations

Supply chain strategists may want to take a new look at the factors that are used to evaluate supply chain risks as well as the cost and risk of off shoring. The major issues that diminish the effectiveness of a supply chain include: security delays, transportation delays at ports and transportation delays due to weather, earthquakes, fires, strikes, terrorism, employee theft and counterfeiting. Other issues include rising fuel costs, truck driver regulations, potential for dam-age during long transits, product quality control, political instability in foreign countries, human disease (SARS), time in transit due to long travel distances, tariffs, taxes, monetary exchange rates, environmental damage and working conditions in foreign countries. These issues add costs, complicate the process and deeply affect supply chain speed. Supply chain managers should either make provisions that minimize/eliminate these risks or at least have a contingency plan to deal with each risk. Solutions that address these issues are: Source Closer to End Cus-tomers, and Track, Trace, and Control.

Source Closer to End CustomersSupply chain strategists should re-examine sourcing closer to the end customer opportunities. An analysis should be made to determine if all of the supply chain risks mentioned above can outweigh the labor savings realized with off shoring. Furthermore, as local sources implement advanced and more automated production techniques, the impact of labor content will be dimin-ished. In some cases, a mix of local sourcing and off shoring can produce the best results.

Track, Trace, and ControlHere are two solutions to address the supply chain risks of security, theft, and counterfeiting. First, RFID enablement will allow much improved tracking and tracing with improved visibility throughout the supply chain. Also, RFID will reduce labor costs, speed up receiving operations, better control “out of date” and spoiled products in the supply chain, assist with counterfeiting control and improve returns processing. Material flow automation in the distribution center and warehouse can offer superior control over product security. Each movement of a carton or pallet in an ASRS, on a conveyor network or sortation system is tracked with precision. With mechanized automation and software controls, product “touches” are minimized allowing absolute control, and improved security.


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Conclusion

This white paper began with a call to transform. The thesis introduced is basic and becoming increasingly apparent. Supply Chain leadership today must take full advantage of the power of digital redesign supported by available and emerging information systems, automation technol-ogy and process improvements. The journey toward an optimized supply chain never really ends. Nor is it likely the current or even subsequent supply chain leadership will conclude the work. While the purpose of the supply chain has changed very little over the past decades, how retail-ers and wholesales should configure their supply chains to enjoy increasing customer efficiency, effectiveness and relevancy will continuously change. After all, Digital Business Transformation is all about “Fixing things that are broke”, and “fixing things that are not broke”.

About Dematic

Through an integrated approach to process, IT, technologies & professional services Dematic develops best practice logistics systems for production, warehousing, and distribution opera-tions. The engineered solutions are built around process improvements, material handling automation, controls & software. Technologies include light and voice directed order fulfillment, storage/staging systems, conveying & sorting systems, trailer loading systems, WCS software, controls, Quick Tag RFID compliance systems, and performance management software.

Throughout our years in business, from Rapistan to Dematic, our focus has been on customer satisfaction.

If you are interested in learning more about this topic and how we can help automate your distribution center, please contact Dematic at (877) 725-7500.

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Continuing the Tradition

Dematic I Supply Chain Transformation for Retailers and Wholesalers


Supply Chain Transformation for Retailers and Wholesalers

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