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.

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.

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.

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

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

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

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 Second and third network design issues focus on the number and locations of distribution facilities within the supply chain.

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

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

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

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

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

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

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

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) delivered to the right place at the right time in defect-free condition with the correct documentation, pricing, and invoicing

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

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

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

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

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.

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.

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.