Chapter 11 DISTRIBUTION Managing Fulfillment Operations Learning Objectives

Chapter 11 DISTRIBUTION: Managing Fulfillment Operations

Learning Objectives After reading this chapter, you should be able to do the following: ● Discuss the strategic value-adding role distribution plays in the supply chain. ● Recognize the tradeoffs between distribution and other supply chain functions. ● Understand the analytical framework for distribution planning decisions. ● Evaluate fulfillment strategies and distribution methods. © 2013 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

Learning Objectives, continued ● Describe the primary fulfillment processes and support functions in distribution center (DC) operations. ● Use productivity and quality metrics to analyze fulfillment performance. ● Describe how information technology supports distribution operations. ● Discuss materials-handling objectives, principles, and equipment uses. © 2013 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

The Role of Distribution Operations in SCM ● Balancing supply and demand. ● Protecting against uncertainty. ● Allowing quantity purchase discounts. ● Supporting production requirements. ● Promoting transportation economies. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Role of Distribution Operations in SCM, continued ● Distribution Facility Functionality • • Accumulation Sortation Allocation Assortment ● Distribution Tradeoffs • Cost of distribution centers and inventory vs. cost of • • transportation Cost of additional facilities vs. level of customer service Space vs. equipment Equipment vs. people People vs. space © 2013 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

Figure 11. 1 The DC’s Accumulation Role Source: Brian J. Gibson, Ph. D. © 2013 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

Figure 11. 2 The DC’s Mixing Capability Source: Brian J. Gibson, Ph. D. © 2013 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

Table 11. 1 Value Adding Role of Distribution Operations Source: Brian J. Gibson, Ph. D. © 2013 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

Figure 11. 3 Functional Tradeoffs Source: Brian J. Gibson, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9

Figure 11. 4 Strategic Distribution Decisions Source: Brian J. Gibson, Ph. D. © 2013 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

The Role of Distribution Operations in SCM, continued ● Distribution Challenges • Labor availability • Demand variation • Increasing customer requirements © 2013 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

Distribution Planning and Strategy ● Capability requirements • Product characteristics e. g. , product value, durability, temperature sensitivity, obsolescence, and volume must drive the design of the distribution process. • Two options for product flow: ○ Direct shipment of goods ¨ ¨ from the manufacturer to retailer from the retailer to consumer ○ Movement of goods through distribution facilities to customers • Must analyze the inventory, transportation, and service trade offs before choosing between direct shipping and the use of distribution facilities. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Distribution Planning and Strategy, continued ● Distribution Challenges • Labor availability • Demand variation • Increasing customer requirements ● Network Design Issues • Inventory positioning focuses on the issue of where inventory is located within the supply chain ○ Single location ○ Multiple customer-facing positions • Second and third network design issues focus on the number and locations of distribution facilities within the supply chain. © 2013 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, continued ● Network Design Issues, continued • Number of facilities needed for a supply chain involves the evaluation of cost tradeoffs with other functional areas: ○ Transportation costs ○ Cost of lost sales ○ Warehousing costs ○ Inventory costs • Own or contract? ○ Private DCs are internal facilities owned by the organization ○ Public warehousing is the traditional external distribution option ○ Contract warehousing is a customized version of public warehousing in which an external company provides a combination of distribution © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14

Distribution Planning and Strategy, continued ● Facility Considerations • First facility consideration is to determine the size of each operation within the network. ○ An area may be needed for processing rework and returns ○ Office space is needed for administrative and clerical activities ○ Space must be planned for miscellaneous requirements © 2013 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

Figure 11. 6 Distribution Cost Tradeoffs Source: Edward J. Bardi, Ph. D. © 2013 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

Figure 11. 7 Distribution Cost Comparison Source: Edward J. Bardi, Ph. D. © 2013 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

Table 11. 2 Factors Affecting Distribution Facility Ownership Source: Brian J. Gibson, Ph. D. © 2013 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

Table 11. 3 Facility Layout Principles Source: Brian J. Gibson, Ph. D. © 2013 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 Execution ● Product-Handling Functions • • Receiving – transferring goods into facility Put away – moving goods into storage locations Order picking – selecting goods for customers Replenishment – moving product from storage locations to picking slots • Shipping – loading goods for delivery ● Support Functions • Inventory control • Safety, maintenance, and sanitation © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Distribution Execution, continued ● Support Functions, continued • Security • Performance analysis • Information technology © 2013 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

Figure 11. 8 Primary Distribution Center Processes Source: Brian J. Gibson, Ph. D. © 2013 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

Table 11. 4 Best Practices in Order Picking Source: Adapted from The Journey to Warehousing Excellence, (Tompkins Associates) Section 2 © 2013 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 Metrics ● Customer Facing Measures • Order accuracy and order completeness ○ Customers want to receive the exact products and quantities that they ordered, not substitute items, incorrectly shipped items, or wrong quantities ○ Timeliness is a critical component of customer service ○ Perfect order index (POI) • Perfect order index (POI) ○ Delivered to the right place ○ at the right time ○ in defect-free condition ○ with the correct documentation, pricing, and invoicing © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Distribution Metrics, continued ● Internal Measures • Distribution cost efficiency • Aggregate cost efficiency ○ Total distribution spending versus goal or budget • Asset utilization • Resource productivity ○ Distribution costs averaging nearly 10 percent of a sales dollar • Resource efficiency © 2013 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

Table 11. 5 DC Metrics and Benchmarks Source: Manrodt, Tillman, and Vitasek, “A Bright Side to Dark Times”, DC Velocity (April 2010) 42 -44 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26

Distribution Technology ● Warehouse Management Systems • Software control system that improves product movement and storage operations • Value-added capabilities ○ Generate performance reports ○ Support paperless processes ○ Enable integration of materials handling equipment ○ Picking systems ○ Sorting systems ○ Leverage wireless communication © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Distribution Technology, continued ● Automatic Identification Tools • Technologies helping machines identify objects. ○ Barcode scanners ○ Mobile computers ○ Wireless local area networks (LAN) ○ RFID © 2013 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

Summary ● Distribution operations perform inventory handling, storage, and processing activities to create time and place utility for the supply chain. ● A variety of supply chain challenges—balancing supply and demand, protecting against uncertainty, and promoting transportation economies, among others—can be addressed by distribution facilities. ● Four primary functions are carried out by traditional distribution facilities: (1) accumulation, (2) sortation, (3) allocation, and (4) assortment. ● Distribution operations are taking on value-adding roles —assembly, kitting, product postponement, sequencing, etc. —to complement their basic functionality and to support evolving supply chain needs. 29 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Summary, continued ● Tradeoffs must be made between space, equipment, and people—the primary resources available to distribution managers. ● It is critical to match distribution processes to the items being handled to protect product integrity, promote customer service and satisfaction, and provide greater control of the inventory. ● Distribution network design issues involve centralization/decentralization of inventory, the number and location of facilities, and facility ownership. ● Effective facility planning—operational size, layout, and product placement—positively impacts labor productivity and response time. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30

Summary, continued ● Distribution execution involves five primary processes related to the handling and storage of product: (1) receiving, (2) put-away, (3) order picking, (4) replenishment, and (5) shipping. ● Fulfillment 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. ● Distribution KPIs address asset utilization, labor productivity, and cost efficiency of the operation, as well as customer service quality issues and the ultimate goal of perfect order fulfillment. © 2013 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, continued ● Warehouse management systems software solutions improve product movement and storage operations through efficient management of information and completion of distribution tasks. ● Barcodes and RFID are the automatic identification tools of choice in distribution to help track, locate, and move product quickly—with near-perfect accuracy rates to their consumers. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32