Distribution

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Distribution Logistics Strategies

• Henry C. Co
• Technology and Operations Management,
• California Polytechnic and State University

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Strategy

• strategy
• NOUN
• Inflected forms pl. strategies
• The science and art of using all the forces of a
  nation to execute approved plans as effectively
  as possible during peace or war The science and
  art of military command as applied to the overall
  planning and conduct of large-scale combat
  operations.
• A plan of action resulting from strategy or
  intended to accomplish a specific goal. See
  synonyms at plan.
• The art or skill of using stratagems in endeavors
  such as politics and business.

American Heritage Dictionary of the English
Language Fourth Edition. 2000
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• Logistic costs in the U.S. are rising, from 910
  billion in 2002 to 936 billion in 2003.
• Inventory costs account for a third of logistic
  costs. The ability to respond faster to changing
  customer needs and the flexibility to adjust
  manufacturing and delivery cycles as keys to
  success in this competitive environment.
• Even industries with stable demand patterns spend
  millions of dollars each year coping with
  uncertainty in customer demand and operating
  costs.
• Uncertainty can lead to major supply chain
  inefficiencies, causing lost revenue, poor
  service, high inventory levels and unrealized
  profits.

15th Annual State of Logistics Report (Council of
Logistics Management, 2004)
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Five Areas of Focus

• Facility Sizing/Space Requirements
• Warehouse Management Systems
• Storage Systems
• Order Fulfillment Methodologies
• Material Handling Requirements

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Facility Sizing/Space Requirements

• How big?
• Industry standard practices
• Companys uniqueness space requirements
• Inventory profiles
• SKU velocity
• cube data

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Warehouse Management Systems

• Evolution of WMS
• Initially a system to control movement and
  storage of materials within a warehouse
• Role of WMS has expanded to including light
  manufacturing, transportation management, order
  management, and complete accounting systems.
• WMS is evolving into a warehouse-focused ERP
  system!

Side Note MRP started as a system for planning
raw materials requirements in a manufacturing
environment. Soon MRP evolved into MRP II, adding
scheduling and capacity planning logic into the
system. Eventually, MRP II evolved into ERP,
incorporating MRP II functionality with full
financials and customer-vendor management
functionality.
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• Functionality of WMS overlaps with
• Enterprise Resource Planning, Distribution
  Requirements Planning, Transportation
• Management Systems, Supply Chain Planning,
  Advanced Planning and Scheduling, and
• Manufacturing Execution Systems.

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Core WMS Functionality

• To control the movement and storage of materials
  within an operation.
• Picking
• Replenishment
• Put-away
• The detailed setup and processing
• Vary from one software vendor to another.
• However the basic logic will use a combination of
  item, location, quantity, unit of measure, and
  order information to determine where to stock,
  where to pick, and in what sequence to perform
  these operations.

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Storage Systems

• Basic selective rack system
• Complex multi- level pick module
• Automated Storage and Retrieval System (AS/RS)

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Order Fulfillment Methodologies

• Cost-effective solution that provides the highest
  performance, scalability, and future growth
  capabilities.
• Fulfillment methods depends on specific order
  characteristics
• Order profiles
• Product velocity
• Cube, and
• Replenishment cycles

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• Order Fulfillment Methods
• Pick and pass
• Pick to belt
• Bar code/RFID
• Voice-directed pick
• Dynamic light directed zone pick
• Carousel, pallet
• Carton flow pick

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Material Handling Requirements

• Seasonality
• Creates inefficiencies
• Capacity issues and bottlenecks based on those
  SKUs, orders, or other issues that create steep
  spikes in the companys daily throughput
  requirements.
• A robust system design can handle the variability
  in the companys everyday order volume while
  providing the reserve capacity to manage the
  seasonal spikes.
• Material handling requirements depend on key
  business and customer metrics
• Order profiles
• Market trends
• Order drop rates
• Daily peaks and valleys of the order fulfillment
  and replenishment processes.
• Other business factors.

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Contemporary Issues and Practices
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Central vs. Distributed Control
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Distribution Control

• Centralized
• Key decisions are made by a single entity for the
  entire supply network
• Cost/service goals
• Can lead to global optimization
• Must have access to common data for this to work
• Decentralized
• Each facility in the system makes its own
  decisions
• Only considers its individual goals
• Will lead to local optimization
• Increases the bullwhip effect

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National vs. Regional Distribution Facilities
Regional/Local
National/Central
Supplier
Warehouse
Retailers
Distribution Strategies, Brian J. Gibson,
Auburn Logistics Foundation
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National/Central Distribution

• Advantages
• Lower safety stock levels
• Lower overhead costs
• Economies of scale
• Disadvantages
• Longer lead times
• Higher delivery costs
• May become too large to manage effectively

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Regional/Local Distribution

• Advantages
• Shorter lead times
• Better customer knowledge and service
• Lower delivery costs
• Disadvantages
• No risk pooling opportunity higher safety stock
• Higher overhead costs more staff required
• Limited economies of scale

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Warehouse Territory

• This part taken from Ronald H. Ballou, Business
  Logistics Management, Prentice Hall, 1992

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The Landed Cost Method
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Warehouse And Transportation Rates
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Mileage
Between Warehouse Locations
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Warehouse Territory Boundary
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(No Transcript)
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Push vs. Pull
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• APICS conducted a highly successful MRP campaign
  in the late 60s.
• APICS American Production and Inventory Control
  Society
• MRP Materials Requirements Planning
• MRP plans for all component parts and raw
  materials that are required to produce all the
  products in the master production schedule (MPS).
  
• Component parts and raw materials are push to
  the workstations, in time for assembly.

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Push

• Push applicable where setup cost is high, or
  when demand seasonal/lumpy.
• Problem
• Whenever the MPS is revised (often!), component
  parts and raw materials ordered in anticipate of
  their needs will not be consumed as planned.
• Bullwhip effect changes in MPS create changed
  requirements in feeder operations that are
  usually amplified because of lot size rules,
  set-ups, queues, and waiting time. A 10 changed
  in MPS could result in a 100 change in raw
  material usages!

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Pull

• JIT initiates production to replenish inventory
• JIT Just-In-Time (Toyota, 1970s)
• Production at one stage is linked immediately to
  consumption at next stage of the supply chain.
• e.g., Today, ,the final assembly workstation just
  completed the assembly of 200 chairs.
• A total of 200 x 4 800 legs have been withdrawn
  from inventory.
• The workstation fabricating the legs will produce
  exactly 800 legs tomorrow.
• Thus, a workstation pulls output from the
  preceding station as needed, and the station
  produces to replenish inventory.
• Obviously, for the Pull system to work, the setup
  cost must be low, and demand stable.

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• In a Pull system, an order to replenish an item
  is placed as soon as it is used.
• The obvious assumption is that future demand
  equals past demand.
• Otherwise, the wrong quantity will be ordered at
  the wrong time.
• Pull system works in Toyota because of the unique
  way Toyota structure its master production
  schedule.
• Master production schedule in MRP seeks economies
  and efficiencies through economical lot sizes.
• In JIT production, the MPS is prepared with the
  goal of scheduling every product every day.

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Distribution Strategy Push

• Traditional
• Supply chain activity is based on long-term
  forecasts
• When to use
• Products have long lead time, short shelf life,
  or seasonal demand
• Challenges
• Being responsive, managing inventory, combating
  product obsolescence, reducing bullwhip effect

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Distribution Strategy - Pull

• Contemporary
• Supply chain activity is based on customer demand
• When to use
• Products/materials with stable demand patterns,
  short lead times, consistent quality
• Challenges
• Supplier quality and consistency, information
  sharing, order cycle time, reducing costs and
  inventory rather than shifting them

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Ship Direct, Cross-Docking, and Other Strategies
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Distribution Strategies
Direct Shipment
Warehousing
Cross-docking
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Direct Shipping

• Eliminates need for intermediate facilities
  (e.g., warehouses and distribution centers).
• Dell computer orders for desktop computers will
  have the monitors picked up directly from Sony,
  and delivered to the customer.
• Warehouse club stores, grocery stores, and mass
  merchandisers are adopting the DSD (direct store
  delivery) strategy where manufacturer delivers
  goods directly to the retail outlet or the
  customer.
• Perishable items, high volume goods, high bulk
  items, and specialty products are primary
  candidates for direct shipping.

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Benefits of Directing Shipping

• Less inventory in the supply chain
• Less handling and opportunity for product damage
• Faster production to store shelf time
• DSD categories are among the most profitable in
  the store
• Higher productivity, sales, service, satisfaction
• Improved accuracy invoices match receiving
  records, correct products enter the store

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Save Mart Supermarkets report saving 500,000 a
year in accounting and bookkeeping costs
after implementing DSD and a related software
package. Adding evening deliveries would cost
retailers in a typical 100-store chain 97,000
per year but would save suppliers 164,500 a year
by enabling suppliers to cut back on trucks and
reduce waiting time. (Gibson, 2003)
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Direct Shipping Challenge

• Greater hassle for store personnel
• More deliveries, paperwork, activity
• No risk pooling benefit
• No safety stock in the event of a supplier
  problem
• Transportation costs can be higher
• Manufacturers may incur extra handling costs by
  picking/shipping to individual stores
• Not well suited to high variation events like
  holidays and promotions
• Few companies have installed DSD receiving systems

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Direct Shipping Challenge
Five to seven years ago, the apparel and
soft-goods industry tried POS-driven
replenishment. But companies found it difficult
to maintain inventory at the accuracy level
required. If youre off by one or two cases at
the warehouse, it doesnt affect you much. In a
store, if you are off by one or two cases, youre
out of stock. Does the store manager in every
store spend a minimum of five minutes each day
observing the back room receiving operations? I
bet he doesnt, and that means youre
not achieving an acceptable level of control at
the back door.
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Cross-Docking

• Cross-docking means to take a finished good from
  the manufacturing plant and deliver it directly
  to the customer with little or no handling in
  between.
• Cross-docking reduces handling and storage of
  inventory, the step of filling a warehouse with
  inventory before shipping it out is virtually
  eliminated. Simply, it means receiving goods at
  one door and shipping out through the other door
  almost immediately without putting them in
  storage.

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• Imagine taking a finished good from the
  manufacturing plant, deliver it to the front door
  of a distributor, and almost immediately, take
  the item out the back door and load it to a truck
  headed for the customer.
• Cross docking shift the focus from "supply chain"
  to "demand chain" by receiving goods at one door
  and shipping out through the other door almost
  immediately without putting them in storage.
• For example stock coming into cross docking
  center has already been pre-allocated against a
  replenishment order generated by a retailer in
  the supply chain.

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Cross-Docking Example
Freight is received, checked for accuracy
prepared for release to stores (bar coded
labels are applied to cartons).
Cartons travel thru facility on conveyor system
to reduce labor and speed transfer of goods.
Bar code reader identifies products and diverts
cartons down appropriate loading line.
Cartons are loaded in trailer and shipped when
trailer is full
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• Cross docking reduces cost
• Increases inventory turns by speeding the flow of
  products from the supplier to the store.
• Cross docking, coupled with consolidating
  warehousing, avoids LTL deliveries.
• Most notably, it eliminates the two most
  expensive distribution operations cost of
  handling and storing inventory.

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Cross Docking Cost Advantage
Conventional process
Cross-dock process
RECEIVE
RECEIVE
0.85 0.58 0.97 0.91 0.89
0.85 0.97 0.65 0.89
PUTAWAY
ORDER PREP
ORDER PREP
3.36 per ton
4.20 per ton
STAGE
PICK/STAGE
LOAD/SHIP
LOAD/SHIP
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• Supports JIT manufacturing.
• Goods shipped from suppliers are captured at
  cross dock, sorted by plant location and
  schedule, and delivered in small batches directly
  to the shop floor.
• Today, cross docking is the bailiwick of the mass
  merchandisers.
• Depending on the company, mass merchandisers
  cross-dock anywhere from 40 percent to 90 percent
  of the goods between the distribution center
  receiving doors and the retail store floor.
• Mervyns, for example, cross-docks more than 30
  of its product, and Wal-Mart operates 19
  cross-docking facilities to support Sams Club
  division.
• Other than mass merchandisers, grocery companies,
  LTL trucking companies and air cargo carriers are
  the leading cross-dock users.

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Cross-Docking Challenges

• Cross-docking requires supply chain
  synchronization.
• Supply chain synchronization relies on strong IT
  capabilities (ASN via EDI, Bar codes on cartons,
  etc.) and real-time information sharing.
• Works best if trading partners engage in
  collaborative planning, forecasting, and
  replenishment.
• Cross-docking may necessitate
• New facility layout,
• bar code scanning equipment, and
• WMS (500,000 investment) to maintaining product
  visibility as it moves through the system.
• To support JIT, product availability, accuracy,
  and quality are critical since goods are shipped
  directly from supplier to the shop floor.

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Cross-Docking Challenges
one of the principal barricades has been that
cross-docking requires a lot of supply chain
synchronization, which, in turn, relies on better
information and planning. As more companies, even
industries, move toward a "pull" form of
replenishment rather than the "push" form we're
used to, cross-docking will make more sense.
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Other Distribution Strategies

• Pool Distribution
• Transshipment
• Milk-Run Systems

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Pool Distribution

• Consolidating merchandise shipments at the origin
  into loads destined for defined regions
• Transporting the load to a central point in the
  region and making local deliveries from the
  central point.

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Consolidation Warehouse

• Consolidation warehousing is a form of
  warehousing that pulls together small shipments
  from a number of sources (often plants) in the
  same geographical area and combines them into
  larger, more economical, shipping loads intended
  for the same area.
• Consolidation warehouses are typically
  constructed at a strategic location between
  manufacturers and customers. The goal is to
  maximize transportation utilization and minimize
  costs.
• Benefits
• Reduced transportation costs, better service
• Requires
• Multiple delivery points within a region
• Significant, consistent volume entering the region

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A motor vehicle assembly plant in San Diego uses
pull system to replenish inventory from three
suppliers in the mid-west.
From Ronald H. Ballou, Business Logistics
Management, Prentice Hall, 1992
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• San Diego receives daily shipments of
• 30,000 lbs of axle from Detroit,
• 35,000 lbs of transmissions from Cleveland, and
• 38,000 lbs of engines from Pittsburgh.
• Two alternative approaches
• Suppliers to ship directly to San Diego, or
• Use consolidation warehouse in Cleveland

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Direct Shipping Cost

• Ship direct long-haul at less-than truckload
  (LTL) quantities
• 4.80/CWT from Detroit,
• 5.00/CWT from Cleveland, and
• 5.30/CWT, from Pittsburgh.

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Consolidation Warehouse

• Lease warehouse in Cleveland to consolidate
  shipments from suppliers
• LTL shipping costs from suppliers to the
  Cleveland warehouse
• 0.50/CWT, from Detroit supplier,
• 0.20/CWT, from Cleveland supplier, and
• 0.40/CWT, from Pittsburgh supplier.
• Cleveland warehouse charges are estimated to be
  110, 120, and 125 per day for shipments from
  Detroit, Cleveland, and Pittsburgh, respectively.
  
• The shipments are combined, and shipped by rail
  to San Diego at 2.50/CWT.

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• The spreadsheet below shows a total cost of
  3,302 for using the Cleveland warehouse.

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• Consolidating warehouses, couple with cross
  docking (next section) supports just-in-time
  (JIT) manufacturing.
• For example,
• The NUMMI plant in California uses cross-docks in
  Chicago and Memphis to collect, consolidate, and
  sort freight from multiple vendors into
  containers that are shipped via rail to the
  plant.
• Suppliers send parts in bulk to GM cross-dock in
  Memphis. Parts are sorted for delivery to 15
  different production facilities in the Midwest.

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Transshipment

• Transshipment Sharing of inventory between
  facilities at same level in the supply chain.

http//www.opem.northwestern.edu/r2.html

• Opportunity
• Better customer service, fewer stockouts
• Requires
• Inventory visibility
• Cooperation
• Shipping and delivery processes

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• Many clothing and footwear retailers, such as
  Macy's and Footlocker, request articles from
  other retail locations when a specific product
  (because of size or design) is unavailable.

• Consumer electronic stores have also employed
  such a practice with cameras, video recorders and
  televisions.
• Typically retailers will hold high levels of
  inventory in order to avoid stock-outs, with the
  flexibility that transshipments bring, retailers
  are able to meet uncertain demand with lower
  inventory levels.

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Milk-Run Systems
Source of Schematic http//www.engr.uky.edu/me/ia
es/group_press/chuah.pdf

• Drivers pick up goods from suppliers along a
  route and delivering the entire load to a single
  facility.
• Benefits Supports JIT systems, eliminates
  distribution centers.
• Requires
• Consistent schedule, high volume
• Dedicated carrier or private fleet.

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Source http//www.engr.uky.edu/me/iaes/group_pres
s/chuah.pdf