CHAPTER 10 Distribution Managing Fulfillment Operations Supply Chain

CHAPTER 10 Distribution— Managing Fulfillment Operations Supply Chain Management: A Logistics Perspective (10 e) Coyle, Langley, Novack, and Gibson © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Discussion Outline Ù The role and functionality of distribution facilities Ù Key distribution tradeoffs and challenges Ù Distribution planning and strategy Ù Distribution execution and metrics Ù Distribution technology © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2

The Role of Distribution Operations in SCM 7 6 Promote transport economies Enhance customer service Fulfill omnichannel demand 5 1 Balance supply & demand 2 Support production requirements 4 Allow quantity purchase discounts Protect against uncertainty 3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3

Distribution Facility Functionality Primary Functions Distribution Facility Functionality Value. Adding Roles 1. 2. 3. 4. Accumulation Sortation Allocation Assortment Examples: Assembly, kitting, product postponement, sequencing © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4

Distribution Facility Functionality Primary Functions: Accumulation The DC serves as a collection point for product coming from multiple origins and provides required transfer, storage, or processing services, allowing firms to consolidate orders and shipments for production and fulfillment processes. Direct Delivery – No Accumulation DC – Accumulation Source: Figure 10. 1 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5

Distribution Facility Functionality Primary Functions: Sortation and Allocation Sortation Allocation Sortation focuses on assembling like products together for storage in the distribution facility, processing or transfer to customers. Proper sortation is essential for effective inventory & order fulfillment. Allocation focuses on matching available inventory to customer orders for an SKU. This break-bulk capacity promotes product availability for multiple customers and in desired quantities. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6

Distribution Facility Functionality Primary Functions: Assortment involves the assembly of customer orders for multiple SKUs held in the distribution facility. This mixing capability avoids the expenses related to placing numerous orders and having them shipped from a variety of locations. Supplier ships in bulk DC mixes & ships Retailer receives variety Source: Figure 10. 2 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7

Distribution Facility Functionality Value-Adding Roles Ù Light assembly services Ù Inventory management and visibility Ù Product kitting, bundling, and unbundling Ù Product postponement Ù Production Ù Quality sequencing control Ù Recycling, repair, and returns management © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8

Key Distribution Tradeoffs and Challenges

Key Distribution Tradeoffs Functional Tradeoffs Facility-Level Tradeoffs How to best balance customer service and costs. How to best balance financial and performance. Warehouse Transportation Inventory Customer service Space Equipment People © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10

Key Distribution Tradeoffs Functional Tradeoffs Warehousing cost Transport cost Warehouse vs. Inventory cost Logistics Cost Warehouse vs. Transportation Number of Warehouses Warehousing cost Number of Warehouses Logistics Cost Warehouse vs. Customer Service Warehousing cost Cost of lost sales Number of Warehouses Source: Figure 10. 3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11

Key Distribution Tradeoffs Facility-Level Tradeoffs Space vs. Equipment. The larger the facility and the more space used for distribution operations, the more equipment will be needed in the facility. People vs. Space. The larger the facility workforce, the larger the facility size and throughput possible. Space Equipment People Equipment vs. People. The greater the use of equipment to automaterials handling and distribution activity, the lower the labor requirements of a facility. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12

Key Distribution Challenges Labor Availability Issues Nature of DC operations work creates ongoing turnover challenge Ù Smaller labor pool due to aging demographic trend in Europe and the United States. Ù Solution: DC automation Ù Demand Variation Seasonal demand creates challenges in effectively utilizing the space and equipment resources and retaining labor throughout the year. Ù Solution: Balancing the DC requirements of seasonal products with products that have alternate primary selling seasons and/or stable yearround demand products. Ù Increasing Customer Requirements Growth in additional capabilities and services. Ù Lean strategies creating expectation of smaller, more frequent, and faster fulfillment of orders. Ù Solution: Flexible fulfillment processes Ù © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13

Distribution Planning and Strategy

Distribution Planning and Strategy Distribution strategies should tailor to products being handled, customer requirements, and available internal expertise and resources. A series of interrelated planning decisions must be made to ensure that the strategy can be executed at a reasonable cost while supporting supply chain demands. • Product attributes • Flow requirements • Roles to be fulfilled Capability Requirements Strategic Planning Network Design Issues • • Inventory positioning Number of facilities Location of facilities Facility ownership • Size of operations • Interior layout • Product location Facility Considerations Tactical Planning Source: Figure 10. 4 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15

Distribution Planning and Strategy Cross-Docking: Low-Tech Option Heavy reliance on manual labor. Receive Sort/stage Load Deliver Source: Figure 10. 5 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16

Distribution Planning and Strategy Cross-Docking: High-Tech Options Heavy reliance on automation. Freight is received, checked for accuracy & prepared (auto ID labels applied to cartons) for induction. Cartons travel thru facility on conveyor system to reduce labor & speed transfer of goods. Barcode reader identifies products & deliver cartons down appropriate loading line. Cartons are loaded in trailer. Load of mixed product is shipped to retail outlet when full. Source: Figure 10. 5 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17

Distribution Ù http: //pittsburgh. cbslocal. com/2016/06/06/amazon -contracts-for-its-own-fast-delivery-fromdistribution-center/ Ù https: //www. youtube. com/watch? v=Dg 0 a 64 vcc-Y Ù https: //www. youtube. com/watch? v=Y-l. Bv. I 6 u_hw © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18

Distribution Planning and Strategy Network Design Issues: Number & Location Ù Determining the number of facilities needed for a supply chain involves the evaluation of cost tradeoffs with other functional areas. Ù Effective location selection requires analysis of the DC’s intended function, sources and volume of supply, customer locations and demand patterns, and related fulfillment costs. Source: Figure 10. 6 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19

Distribution Planning and Strategy Network Design Issues: Ownerships Decisions on facility ownerships – private facilities, public facilities, or contract facilities – should be made based on the organization’s expertise vs. scope of tasks required & financial resources relative to the number and size of facilities needed. Public warehousing cost Total cost Private warehousing cost Use public warehousing Use private warehousing Throughput volume Source: Figure 10. 7 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20

Distribution Planning and Strategy Network Design Issues: Ownerships (continued) Factors Affecting Distribution Facility Ownership Favors Private Distribution Favors 3 PL Distribution Throughput volume Higher Lower Demand variability Stable Fluctuating Market density Higher Lower Yes No Security requirements Higher Lower Customer service requirements Higher Lower Yes No Firm Characteristics Special physical control needs Multiple use needs Source: Table 10. 2 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21

Distribution Planning and Strategy Facility Considerations: Size Typically, the more facilities in the distribution network, the smaller they need to be. Ù Demand forecasts for the facility can be used to create a rough estimate of space requirements. Ù Ù Given forecasted demand, each facility must be large enough to: Accommodate the distribution activities that will be performed within the four walls. Interface with the transportation network. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22

Distribution Planning and Strategy Facility Considerations: Layout The company must make decisions regarding aisle space, shelving, materials-handling equipment, and interior dimensions of the facility. Facility Layout Principle Use a one-story facility Benefit Use vertical capacity Minimize aisle space Use direct product flows Deploy warehouse automation solutions Use an appropriate product storage plan Provides more usable space per investment dollar Results in lower construction costs Reduces building footprint and land requirements Provides more storage and processing capacity Avoids backtracking and costly travel time Improves facility productivity and safety Reduces travel time Reduces labor needs Maximizes space utilization and product protection Source: Table 10. 3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23

Distribution Planning and Strategy Facility Considerations: Product Location (Slotting) Slotting is defined as the placement of product in a facility for the purpose of optimizing materials-handling and space efficiency. 1 Commonly Used Criteria Popularity. Locate high volume (popular) items near the shipping area and the low volume (unpopular) items away from the shipping area. 2 3 Unit size. Locate small-size items (cubic dimensions) near the shipping area and larger-size items farther away from the shipping area. Cube. Locate the items with smaller total cubic space requirements (item cube multiplied by the number of items held) near the shipping area and those with larger space requirements farther away from the shipping area. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24

Distribution Planning and Strategy Facility Considerations: Slotting (continued) Proper product slotting can improve fulfillment performance and generate other advantages for the organization & its customers. Load building Efficient replenishment Picking productivity Ergonomics Picking accuracy Work balancing Preconsolidation © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25

Distribution Execution & Metrics

Distribution Execution Product-Handling Functions Storage locations Receiving • Schedule carriers • Unload vehicles • Inspect freight • Verify order Put-away • Identify product • Verify location • Fill storage/pick slots • Direct fill orders For many organizations, order picking is the most labor-intensive and expensive distribution activity, often accounting for more than half of DC operating costs. Replenishment • Re-supply pick slots • Move pallet quantity orders to shipping dock • Verify moves Picking locations Order Picking • Travel to pick slots • Validate SKU & qty • Fill customer orders • Prep & deliver product to shipping dock Shipping • Schedule carrier Customer • Load vehicle delivery • Secure freight • Complete paperwork • Call for dispatch Source: Figure 10. 8 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27

Distribution Execution Support Functions Support functions provide coordination between key processes and across the supply chain, protect the organization’s inventory investment, and improve working conditions within the facility. Key support functions Inventory control Safety, maintenance, and sanitation Security Performance analysis Information technology © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28

Distribution Metrics Many aspects of distribution performance can be evaluated across customer service and DC order fulfillment activities. Customer-Facing Metric Examples Unit Fill Rate Case Fill Rate Order Value Fill Rate Order Accuracy Document Accuracy Distribution Operation Metric Examples Distribution cost per unit Distribution cost ratio Capacity utilization Equipment utilization On Time Dispatch Labor productivity Perfect Order Index Distribution efficiency Source: Tables 10. 5 and 10. 6 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29

Distribution Technology

Distribution Technology Barcode Types UPC-A barcode GS 1 Data. Bar GS 1 QR Code Warehouse Management Systems (WMS) Automatic Identification (Auto-ID) Tools Core software used to manage fulfillment processes, with value -added capabilities, including labor management, automated data collection, task interleaving, fulfillment flexibility, and systems convergence. Auto-ID technologies help machines identify objects. Examples: Bar codes, smart cards, voice recognition, biometric technologies, radiofrequency identification (RFID). Source: Figure 10. 9; WMS image courtesy of datexcorp. com © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31

Summary Ù Ù Ù Four primary functions of distribution facilities are: Accumulation, Sortation, Allocation, and Assortment. Value-adding roles of distribution facilities complement the primary functions and support evolving supply chain needs. Distribution strategy and planning involves decisions regarding capability requirements, network design issues, and facility considerations. Distribution execution involves five primary processes related to the handling and storage of product: (1) receiving, (2) putaway, (3) order picking, (4) replenishment, and (5) shipping. Distribution KPIs address asset utilization, labor productivity, cost efficiency of the operation, and customer service quality.