Digital-Age Warehousing

Dec. 21, 2004
Best-practice manufacturers are concentrating facilities, outsourcing, and cross-docking. Meanwhile, warehouses' roles are expanding.

Two years ago at the annual meeting of the Warehousing Education and Research Council (WERC), a panel of industry experts -- manufacturers, consultants, warehouse operators, and educators -- were asked to debate whether warehouses would exist in the age of e-commerce and virtual enterprises. Would they disappear, a relic of an outmoded business model? Could companies get their products to market without the bricks and mortar so characteristic of traditional distribution channels? Although the panelists agreed that the physical infrastructure of supply chains would not simply evaporate in years to come, warehousing's role, they said, would change. Just how it would change, the panelists were not sure. Two recently published studies, however, shed some light on this question. WERC, which is based in Oak Brook, Ill., sponsored both studies. Less storage, more flow The pressure for manufacturers to reduce inventory all along the supply chain has never been greater. To support this objective, companies are adopting two strategies that are reshaping their distribution networks. First, best-practice manufacturers operate fewer holding locations. Many businesses dramatically cut their number of inventory-holding points in the last few years. According to a survey conducted by Arnold Maltz, assistant professor of supply-chain management at Arizona State University in Tempe, consumer-goods companies have implemented the largest reductions. For example, two major companies in the survey decreased their inventory sites from 45 to 20 and from 19 to eight, respectively. The number of warehouses necessary for a national network seems to vary between two and five for three-day service and averages about seven for two-day service -- with the number determined by transit times customers require. The warehouses in these networks tend to be large, but smaller than the combination of locations they replace. And the companies tend not to own or even operate these facilities. Rather, they contract with third-party logistics-service firms to build and run the new sites. Second, best-practice manufacturers do all they can to increase inventory velocity. Today, stored inventory -- goods at rest -- is anathema to most enterprises. Warehouses, therefore, are evolving into flow-through or cross-docking facilities. Goods enter one side of the building, are reconfigured to customer/shipment requirements, and immediately move out the other side of the building. According to Maltz's survey, high-performance warehouses cross-dock 50% or more of incoming goods and set targets of 25 to 50 turns per year. Better information technology makes this acceleration possible, as do more knowledgeable warehouse workers. New facility designs reflect this need for speed. Maltz's research shows that new warehouses are narrower, with fewer square feet per door. Truck parking lots are larger because more trailers are being left to be loaded and unloaded as part of the cross-docking operation. These facility-design traits result in about 18% higher cost per square foot, according to one commercial-real-estate operator. Despite the trend toward flow-through operations, the role of the warehouse as a storage site will not disappear completely. "Not every production process can be put on a make-to-order basis," writes Maltz. "Consumers will still concentrate purchases around Christmas, and suppliers will have produce available only at harvest time. Sales forecasts will continue to be wrong. In all these cases, stored inventory may be the most economical way to satisfy customers." Providing flexibility At the same time that manufacturers are paring down their distribution-facilities networks and pushing for higher velocity, they are looking to the warehouse to provide supply-chain flexibility. The need for this "shock absorber," as Maltz calls it, manifests itself in two ways. First, customers often request product or packaging modifications after the goods complete the production process. This task falls to the warehouse. Second, companies frequently relocate or shift supply-chain activities, and the warehouse is asked to take up the slack or fill in any gaps. In the future, the warehouse may be responsible for any processing not completely compatible with in-place manufacturing capacity, the Arizona State professor believes. Post-production quality testing, specialized packaging and display assembly, and returned-goods processing are often assigned to the warehouse. As warehouses assume more of these manufacturing and assembly-related tasks, the line demarcating manufacturing and warehousing will continue to blur. The two disciplines will work in concert to satisfy customers, with tasks performed at the most cost-effective location. Adding more services and functions to the warehouse's activity carries risks. The additional complexity can seriously tax a distribution center's ability to execute its supply-chain functions. More than likely, the agility and sophistication of the warehouse's information-management systems will determine success in this area. "The distribution center's role in the supply chain has always been about execution," says Bruce Richmond, global head of Andersen Consulting's distribution practice, Atlanta. "While there is a multitude of celebrated advances taking place in supply-chain planning and synchronization, their value will be minimal if supply-chain execution cannot keep pace." The information hub Here's where recent advances in warehouse management systems (WMS) come into play. These sophisticated programs are the brains of the warehouse -- managing and monitoring all of its daily distribution tasks. A new generation of WMS, now being rolled out, offers considerably more functionality and flexibility than older WMS. Currently there are three basic types of WMS on the market. They are:

  • Warehouse modules contained in enterprise-resource-planning (ERP) systems.
  • Custom software solutions designed for individual users.
  • "Packaged" warehouse-management solutions.
Today, limitations in ERP warehouse-module functionality and challenges associated with custom systems prompt most companies to choose packaged WMS solutions, Richmond observes in his study "Warehouse Systems and the Supply Chain: A Survey of Success Factors." "ERP systems are not providing the required functionality for most of today's more complex distribution operations," says Richmond. "Our data indicate that almost six out of 10 ERP purchasers did not even consider the ERP's warehouse module for their operation." WMS must be able to process vast amounts of information quickly, with the highest degree of accuracy. This is particularly true in light of the escalating demands for speed throughout the supply chain. "When you start to collapse the supply chain, accuracy in execution becomes critical," the Andersen consultant notes. "Any lack of accurate information and processes creates costly bottlenecks in the flow of goods and materials." Given these developments, the warehouse has become and will continue to be an information hub within the supply chain. Impact of new channels New distribution channels such as consumer direct and the Internet will have a tremendous effect on how companies configure and operate their distribution networks. Customers increasingly demand real-time order fulfillment and visibility into order shipment and status. As manufacturers gain "direct to consumer" expertise, the profile of the order leaving the manufacturer's warehouse will change. Order sizes of one, increased daily order volumes, small-parcel shipments, and same-day shipments will become reality. "All of this points to more complex distribution operations requiring real-time, highly integrated information-systems capabilities," Richmond notes. The fulfillment end of Web commerce presents real challenges to companies' distribution networks. "There's a huge potential for overpromising on a Web site," observes John Menzies, chairman of Terminal Corp., a warehousing provider in Baltimore. "How well a company keeps its service promises will separate the leaders from the pack. The leaders back up their Web sites with the systems and logistics know-how to make them work." While many companies today use the Internet to reach their customers, more will begin to use the Web to manage their supply chains. "Suppliers, manufacturers, distributors, and retailers use the Web to exchange information, which allows for better planning and shorter delivery times," explains Richmond. "As companies migrate to business-to-business e-commerce, WMS will need to become Web-enabled tools. The WMS may be pulling down incoming purchase-order information from a Web site, may be going to a transportation Web site to list shipping information on outbound documents, and may go to a manufacturer's Web site to download needed product characteristics." Already, 22% of the Andersen/WERC survey participants noted that their WMS interfaced in some way over the Internet. The business of transformation Warehousing, as part of the total supply chain, must support the objectives of reducing costs and improving service. In accomplishing these goals, warehousing will face the following challenges:
  • Continued pressure to decrease costs.
  • Higher and higher expectations for accuracy.
  • Continued emphasis on minimizing inventory through postponement programs, consolidated holding sites, and cross-docking programs.
  • Rapid spread of collaborative planning and electronic commerce as a means of reducing cycle times, inventory, etc.
  • More and more requirements for same-day shipping based on electronic orders.
  • The need to perform light manufacturing for individual customers.
  • The ability to handle all emergency situations and be the product processor of last resort.
"As the function of the warehouse evolves from an inventory storage center to a distribution center designed to move products and add value, these facilities are becoming increasingly mission critical," Richmond says. "They need to add services designed for specific channels or market segments -- to serve customers that have increasingly diverse requirements. All while controlling costs -- not an easy task." Distribution tasks will continue to become increasingly complex. Cross docking, postponement, and value-added services all add to the complexity at the distribution center. Traditional distribution functions of receiving the product, putting it away, picking, and shipping must be executed flawlessly, and the information must be 100% accurate -- or the systems won't work. Traceability, trackability, and accountability also add to the complexity and the need for accuracy. "I think a lot of the future of warehousing is about transformation management," concludes Robert Auray Jr., president and CEO of USCO Logistics, Naugatuck, Conn. "This transformation management could be anything from coordinating and sequencing the inbound flow of parts to a production line, to managing a consolidation center filled with consignment inventory that supplies a network of retail stores with just-in-time merchandise, to customizing product to final customer orders. "It's highly unlikely that such transformation will occur in the back of a trailer," Auray continues. "The old storage model is sleepy and tired. So the future of warehousing lies in being the transformation agent and using appropriate systems and technology to enable that transformation."

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