Continuing globalization and changes occurring in such areas as reverse logistics, environmental sustainability, information technology, and overall supply chain integration enforce to further evolve the strategies, roles, and responsibilities for warehouses. Recently the term Distribution Center (DC) is considered much more appropriate in representing the broad range of activities that now occur in modern warehouses that go beyond filling customer orders to provide an ever-expanding array of value added services.
Distribution centers also facilitate time utility by storing product until it is demanded. Product types often help in determining the need for and specific role of DC’s in the supply chain. Characteristics to be considered include,
- Seasonality in either production or consumption
- Demand variability
- Manufacturing economics
- Marketing and promotional initiatives
- Transportation economics
- Service requirements
- Customizability and variants of product
Products which have extremely high service requirements from a time perspective, poses unique challenges as they may affect the efficiency, performance, and cost of customers’ operations. When demand is unpredictable it is suggested to assemble and ship to order. Inventories remain generic providing more flexibility and thereby reducing costs. Company must be capable to determine the requirements of distribution channel such as location, design and operations, determining the information and technology requirements, and performance measurement in order to achieve successful networks and operations.
Location
In addition to transportation costs, the location of the distribution channel is determined based on the location of major markets and customers, the location of supply points, the volume of product moving to or from supply points and customers, transportation rates, the level of service required, and the product characteristics. Local conditions including access and cost of labor, land and buildings, IT/communications infrastructure, transportation infrastructure, and government policies (e.g. environment, incentives, taxes) also play a significant role in determining location.
Design & Operations
The primary determinants of design and operations of a distribution center are how the product is received, service levels, nature of customer orders, and transportation mode etc. Product characteristics include weight and dimensions, packaging, shelf life, temperature and lot control requirements, and hazardous material requirements. How the product is received is critical to both inbound operations efficiency (dock to stock cycle time) and space utilization/storage efficiency.
In order to optimize the efficiency in inbound operations it is very important to receive material in an immediately storable conveyance such as a pallet, case or a box. Also the types and volumes of orders that are processed and the number of stock-keeping units (SKU’s) in the distribution channels are important in determining layout, equipment selection, and business process requirements. Storage equipment selection should be matched to product characteristics, volume, and any additional unique requirements.
Please note that considering automation in order to reduce transit time in the distribution center almost always represents an opportunity for improved efficiency. Automation of other processes such as receiving, locating/storage, order filling may become a critical constraint particularly if there is a significant variation in demand, change in product characteristics, or change in product mix.
Information Technology Requirements
Information and technology is a critical driver for successfully handling operations in a distribution channel. Short term forecasts help in determining labor and space requirements over a short-term planning horizon where on the other hand long term forecasts are used for capacity planning. Information technology is critical in achieving efficient performance. Warehouse Management Systems (WMS) direct where products should be stored and provide the necessary functionality for the completion and optimization of receiving, storing, and shipping operations, additional functionality may permit the use of hand held devices and bar coding to optimize efficiency and reduce errors. Most WMS systems also include inventory management functionality that permits the distribution channels to have real time information on the inventory status of all items in the distribution channels.
Measuring Performance
The key objectives of any distribution channel include providing the right product, at the right place, right time, and damage free at a competitive cost. Fundamental to achieving and sustaining these objectives is measuring performance. The most common performance measures are handling productivity, space utilization, accuracy, damage, service, cost, and inventory.
- Handling productivity is often measured in units or lines picked per hour or total handling cost per unit.
- Space utilization is evaluated based on the percentage of total space available for storage, percentage of useable storage space actually used for storage, and storage cost per unit of product.
- Accuracy involves measures of location and record accuracy, the percentage of items picked correctly, and the percentage of orders picked correctly.
- To measure the damage, percentage of items picked that are undamaged when received by the customer are considered and the percentage of orders picked without damaged merchandise are considered.
- Service as a measures of performance include fill rate which is based on the number of orders that were filled completely.
- Cycle time is also a critical performance measure to determine service and efficiency where dock to stock cycle time is a critical measure of how long it takes to make material available following receipt and order cycle time measures the elapsed time from order receipt until order shipment. Order cycle time may also include transportation to measure the total elapsed time until the customer receives the product.
- Cost and inventory is a performance measure which includes total distribution centre cost per unit handled, distribution centre cost as a percentage of sales, and inventory turnover.
Performance Monitoring
The continuous measurement of performance is obviously essential to monitor process improvement. Warehouses need to operate within tight service and cost standards.
Warehouses are trying to achieve a number of objectives simultaneously, such as cost minimization, on-time dispatches, and order accuracy. It is therefore common to monitor a range of performance metrics to ensure that the warehouse is operating effectively. These measures typically include:
Service levels:
- percentage of orders dispatched on time;
- percentage of orders fully satisfied (ie all order lines supplied);
- accuracy of order fill;
- stock availability in the warehouse;
- order lead time;
- returns and customer complaints.
Operational efficiency:
- number of cases picked per person hour;
- number of order lines picked per person hour;
- equipment uptime (eg percentage hours equipment available, with no breakdowns or
- routine maintenance).
Cost efficiency:
- cost per case throughput;
- cost per pallet stored;
- conformance to budget (eg for staff costs, rent, equipment maintenance, packing materials).
Resource utilization:
- percentage pallet storage capacity used;
- number of hours per day equipment is used (eg sorters or narrow-aisle trucks) –
- although note that high utilizations may prevent peak throughputs being achieved, so
- these measures need to be interpreted with caution;
- number of standard hours worked.
Stock integrity:
percentage of locations with correct stock (ie in accordance with the computer records,
- as measured during a physical stock-take);
- percentage of SKUs with correct stock;
- stock-turn (i.e. annual throughput/average inventory level). This figure is also often represented as the number of weeks of inventory held in the warehouse.
Cycle times:
- average number of hours between arrival of goods on site and put away to storage location (i.e. available for replenishment or picking);
- average number of hours between customer order receipt and dispatch of goods.
Safety:
- number of days without an accident;
- number of days safety training;
- adherence to safety audits and hazard monitoring.
Personnel:
- number of days skill training;
- percentage of staff multi-skilled;
- absenteeism and sickness rates.
Environment:
- electricity and gas usage;
- water recycling;
- percentage of returned goods or packaging recycled.
