The New Warehousing

Dec. 21, 2004
Its creating fundamental changes in supply chains.

Northern Telecom Ltd. (Nortel) is doing more for its customers than it ever has before, and it is doing it with warehousing. Not warehousing in the old sense of storing product but, rather, warehousing in the new paradigm of managing customized flows with higher-than-ever service requirements. "Our customers want to be able to order from us and have us deliver to their end customer, but make it look like this shipment came from them," says Thomas Weeks, senior manager of U.S. logistics for the telecommunications equipment manufacturer, based in Research Triangle Park, N.C. "This means were no longer just transferring bulk loads to our customers warehouses and letting them worry about shipping 100,000 telephones to all Wal-Mart locations in the Southeast. Our customers now want us to inventory product; give them the visibility to see the inventory so they can allocate against it; pick product; merge it with other equipment; label it the way they need it to be labeled so it looks like its coming directly from them and also complies with the recipients labeling requirements; and ship it to the final customer on-time." All of these tasks are performed in the warehouse -- but not by Nortel. They are performed in six different locations of warehouse space (about 400,000 square feet in all) owned and operated by third-party logistics firm USCO Logistics Services Inc., Naugatuck, Conn. "What we manage today is a huge change from the past when we just shipped a few truckloads of product to the customers warehouse," Weeks observes. "Were essentially skipping an entire level in the distribution chain. By doing so, were reducing our customers inventory and carrying costs." The new role Nortels case is not unique. In fact, it is indicative of the way warehousing has changed, particularly during the last five years. Today, companies use warehouses not to store goods, but to handle integrated flow processes within their internal supply chains. "The world is changing drastically," says Richard Dawe, executive coordinator at the Fritz Institute of Global Logistics, Concord, Calif. "If youre still doing classic warehousing, youre behind the power curve. Storage is an old paradigm." Warehousing is integrally involved in four distinct supply-chain processes: sourcing/inbound, processing/manufacturing, outbound distribution, and reverse logistics (returns, recycling, etc.). These four processes have become much more complex in recent years -- the result of such forces as stock-keeping unit (SKU) proliferation, product customization, just-in-time manufacturing, escalating service requirements, and inventory-reduction strategies. And while many industry pundits talk about "the virtual company" -- a company that carries no inventory and yet gets product to market quickly and effectively -- that reality is far from materializing. "There is still plenty of value that can be added to products and to logistics processes inside the fours walls of the warehouse," insists Edward Frazelle, president of Logistics Resources International, a consulting firm in Atlanta. Instead of disappearing, then, warehousing is evolving. At a recent presentation in Anaheim, Calif., at the annual conference of the Oak Brook, Ill.-based Warehousing Education and Research Council, Frazelle listed 10 reasons to have a warehouse or distribution center (DC) today: 1. Provide local inventory. Example: A customer demands two-hour turnaround globally for service parts. That requires a network of local warehouses. 2. Perform value-added services for the customer. Examples: Creating end-aisle displays; labeling and ticketing product. 3. Operate near vital suppliers, serving as an inbound materials-control center. 4. Act as a consolidation point for orders. Example: Set up a facility where multiple components of a single order are married and then shipped to the customer. 5. Consolidate outbound orders for more economical transportation. 6. Hedge against manufacturing leadtimes. 7. Handle reverse logistics (returns). 8. Perform quality inspections. 9. Enable manufacturing economies. Example: Keep production lines operating at a steady pace while storing finished goods in anticipation of large seasonal demand surges. 10. Enable procurement efficiencies. Example: Buying commodity raw materials when prices drop. The warehouse, regardless of whether it is public or private, is performing tasks that at one time would have been done at a manufacturing point. "Companies understand that it does not make economic sense to perform these functions at manufacturing," notes Arnold Maltz, assistant professor of supply-chain management at Arizona State University, Tempe. "Manufacturing processes are not flexible enough, so the cost is high. Also, manufacturing labor is considerably more expensive than warehouse labor." Dawe points out that the warehouse has become the final point at which product can be changed or adapted for the marketplace. "Companies used to use warehouses as the place to fix last-minute manufacturing problems," he says. "Thats evolved into a widespread practice of using the warehouse to prepare product for the customer. The point here is to shift these activities away from manufacturing or the receiver, to the most economical place to perform them -- the warehouse. This helps complete the order-to-cash cycle as quickly and economically as possible." This kind of postponement is not a new concept, but more companies are doing more of it at the warehouse level. For example, many companies have become frustrated by their inability to predict what the consumer will buy from day to day. "The best forecast is only 20% to 30% accurate beyond eight weeks, and many forecasts dont do a whole lot better than that looking out just seven days," Dawe says. "Companies have put so much money and effort into forecasting, and have gotten such poor results, that finally people are saying, Why dont we just give up and try to react to the actual demand as quickly as possible?" They do this through postponement or building products with modular format assemblies that can be completed in the marketplace within an acceptable order-cycle time. Hewlett-Packard Co. (HP), for example, successfully applied postponement to its European printer business. HP was having problems trying to supply printers to Europe because of the nature of the marketplace -- country differences necessitated different power supplies, different language manuals, and different machine configurations. It tried to forecast country-specific demand and was inevitably off the mark. "The Germans would order more than expected, the Italians would order less," Dawe recounts. "You couldnt take an Italian machine to Germany, so HP had the worst of both worlds -- frequent stockouts and high inventory." HPs solution was to modularize its product, set up several distribution centers (DCs) in Europe, and use them to configure generic printers to their specific markets as orders were received. As soon as HP received an order for a machine from Germany, the DC would configure the printer for that market (plug in the correct power supply, attach the right literature, etc.) and ship it out. This approach eliminated the stockout/high-inventory problem. In the same vein of maximizing the order-to-cash cycle, warehouses have emerged as the ideal place to handle returns. Many companies operate an entire reverse-logistics process that is just as sophisticated as their order-fulfillment operation. In doing so, they have recaptured millions of dollars that once were lost into the black hole of returns. Returns-management/reverse-logistics, in fact, has become big business, spawning an entirely new niche of third-party logistics companies. GENCO Distribution System, Pittsburgh, is probably the largest such third-party service firm. GENCO handles returns, recycling, and refurbishing of all sorts of products, turning them back into cash for their customers. The complexity problem As the warehouse performs more and more value-added tasks, its operations naturally become more complex. Concurrently, logistics transactions themselves have gotten more complex. Each transaction has more work content than ever -- more counting, packaging, labeling, sorting, etc. Unfortunately, as complexity increases, the performance of any logistics system and its components declines exponentially with the number of handling transactions. "Every time you handle a piece of material," explains Frazelle, "productivity gets worse because you have occupied human work effort; accuracy declines because you have introduced the likelihood of error; and response time deteriorates because you have occupied calendar or clock time." Recognizing this, the best companies are doing all they can to take work content out of the warehouse/DC. "If you flew over a DC with a glass ceiling, youd see that most of the work effort is traveling to and from locations," Frazelle suggests. "Thats the place to attack first." A recommended battle plan: Cut traveling and searching out of the process by streamlining or eliminating order-picking activities. Direct-shipping and cross-docking (both practices are on the rise) accomplish this. Direct-shipping bypasses the DC completely. In cross-docking, product simply comes into the DC, gets sorted, and is redirected to the customer. Although not all product flows are good candidates for direct-shipping or cross-docking, many are. Increasingly, sophisticated warehouse information systems facilitate this effort toward simplification. Take warehouse layout, for instance."You can convert order-profile information into answers on how to lay out and run a warehouse," Frazelle says. "We look for that small subset of SKUs that constitute the large percentage of the orders. As soon as I identify the 10% of product that fills 50% of the orders, I can create a separate zone in the warehouse just for that 10%. Every order that can be completed out of there I send there. Why? Because productivity, accuracy, and response time in that area -- called an order-completion zone -- is five to 10 times what it is for the warehouse as a whole." Dynamic networks Postponement and complexity are not the only challenges redefining warehousing today. The supply chain must be dynamically adaptive, able to respond quickly to changing business conditions. On the warehousing level, this means taking a much more fluid approach to warehousing asset use. Specifically, explains Nortels Weeks, it means being able to flex up and down with demand. "No longer will Nortel or any wise, large company try to build, own, and operate a network of dedicated [warehouse] space. Thats just not cost-effective. Instead, they let go of the ownership and all it entails, and move product through a shared asset environment [belonging to a third-party logistics firm]." USCO and Nortel are in the middle of crafting just such an arrangement. This kind of variable space/service arrangement is a significant departure from contracts of old, where the manufacturer contracted for a fixed amount of warehouse space and paid for it, whether it used it or not. "In one situation, Im paying the bill for space Im not using," Weeks says. "My third party is trying to fill that space, but really, whats their incentive? They get paid no matter what." In its newer arrangements, Nortel shares a 60-day rotating forecast with USCO, which in turn uses the information to project and plan space and service needs. USCO devotes more or fewer assets to Nortel depending on forecasted demand. Accomplishing this flexibility in a way that meets Nortels needs and keeps its third-party service provider healthy requires a much greater level of integration of all players. "I feed them the key-driver information statewide, and they forecast space," Weeks explains. "Together we tweak that space forecast. I also inform them of product changes, business trends, interval reductions, and anything else that might impact their operation. They, in turn, give me back metrics and show me the forecast, how it compares to actual, and track a history of results." 100% performance As warehousing has evolved and taken on more roles, it has done so in the face of relentless pressure for perfection. This perfection manifests itself in unprecedentedly high requirements for speed, accuracy, productivity, and value-added services. "Three years ago," recalls Maltz, "95% service performance in warehousing was fine. Today, thats failure -- 100% performance on the basic services in warehousing is becoming the expected. Thats the kind of accuracy the best players are getting out of their warehouses now. On-time delivery is over 99%. Order cycle times in best-practice companies are under three days." Nortels Weeks affirms Maltzs observations. "Service levels or inventory accuracy are no longer negotiable. Our expectation is perfection. My performance objectives dont even indicate service levels any more. If its not 100%, I have to explain it. If my customer satisfaction is low or declining, I have failed. The reliability of a warehouse can only be a negative. It is no longer looked at as being a positive if you have good warehousing -- its just expected. If you dont have it, though, its a big negative." Whats left, then, to differentiate one warehousing/logistics network from another? Innovation. That need to innovate -- and do so cost effectively and better than anyone else -- has driven the kinds of changes seen thus far in warehousing. It is sure to create still more change in warehousings profile.

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