Chapter 11 Distribution—Managing Fulfillment Operations

1. 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.

2. Learning Objectives (cont.) • 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.

3. The Role of Distribution in SCM: • 1. Balancing supply and demand. Whether seasonal production must service year-round demand (e.g., corn) or year-round production is needed to meet seasonal demand (e.g., holiday wrapping paper), distribution facilities can stockpile inventory to buffer supply and demand. • 2. Protecting against uncertainty. Distribution facilities can hold inventory for protection against forecast errors, supply disruptions, and demand spikes. • 3. Allowing quantity purchase discounts. Suppliers often provide incentives to purchase product in larger quantities. Distribution facilities can handle the quantities, reducing the purchase cost per unit. • 4. Supporting production requirements. If a manufacturing operation can reduce costs via long production runs or if outputs need to age or ripen (e.g., wine, cheese, fruit), the output can be warehoused prior to distribution. • 5. Promoting transportation economies. Fully utilizing container capacity and moving product in larger quantities is less expensive per unit than shipping “air” and moving small quantities at a time. Distribution facilities can be used to receive and hold the larger deliveries of inventory for future requirements.

4. Distribution Facility Functionality Four primary functions are: • accumulation • sortation • allocation • assortment

5. 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

11. Capability Requirements • Product characteristics must drive the design of the distribution process such as product value, durability, temperature sensitivity, obsolescence, volume, and other factors • 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 • Advantages of each • Disadvantages of each

13. Network Design Issues • Inventory positioning focuses on the issue of where inventory is located within the supply chain • single location • Advantages • Disadvantages • hold product in multiple customer-facing positions • Advantages • Disadvantages • Second and third network design issues focus on the number and locations of distribution facilities within the supply chain.

14. 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

16. Facility ownership question • 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 • Choosing between private and 3PL distribution options requires significant planning and analysis

19. 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

21. Proper product slotting • improve labor productivity and generate other advantages including: • Reduce order-picking labor requirements by locating product in the optimal pick sequence • Reduce replenishment labor requirements by matching product unit loads with the appropriate size storage slot • Reduce response time and improve flow by balancing workload between operators • Increase picking accuracy by separating similar products to avoid proximity picking errors

22. Reduce product damage by organizing heavier product first in the pick path, ahead of crushable product • Increase palletizing productivity by arranging product by case height, allowing the building of tighter pallets for better trailer utilization • Defer capital expansion by maintaining the optimum warehouse layout and cube utilization, reducing the need for building expansion • Increase store-level productivity by organizing product in family groups eliminating or reducing sorting of product for restocking at the store level

24. Support Functions: • Inventory control • Safety, maintenance, and sanitation • Security • Performance analysis • Information technology

26. Distribution Metrics • Distribution KPIs are objective measures of fulfillment performance that are critical to the success of the organization • Important issues: • cost efficiency • inventory accuracy • order fill rates • capacity utilization

27. 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

28. 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

29. 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

30. Distribution Technology • Warehouse Management Systems • Other value-added capabilities: • Labor management • Task interleaving • Systems integration • Activity-based costing/billing • Multifunction distribution

32. Automatic Identification Tools • WMS utilizes Auto-ID data capture technologies: • barcode scanners • mobile computers • wireless local area networks (LAN) • RFID

33. 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: accumulation, sortation, allocation, and 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. • Tradeoffs must be made between space, equipment, and people—the primary resources available to distribution managers.

34. Summary (cont.) • 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. • Distribution execution involves five primary processes related to the handling and storage.

35. Summary (cont.) • 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. • 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.