OMGT2085

Introduction to Logistics & SCM

Topic 7
Warehousing & Distribution Channels

VpLyonII_0182 (2008), Available: flickr, http://www.flickr.com/photos/titlap/2779796068/ [accessed 1 October 2012]. Photo by Julien Haler.
 Topic Areas

• Role of Distribution in Supply Chain Management Supply

Chain Management
• Distribution Planning & Strategy
• Distribution Execution
• Distribution Metrics
• Distribution Technology
• Packaging

Intro to Logistics & Supply Chain Management 2

 Role of Distribution Operations in
Supply Chain Management

• Role of warehousing (distribution facilities)

– Adds value to firm’s products by creating time utility for raw
materials, industrial goods, & finished products
– Allows firms to use customer service as a dynamic value-
adding competitive tool

Customer service? … how can we achieve this?

Intro to Logistics & Supply Chain Management 3

 Role of Distribution Operations in
Supply Chain Management

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.

Intro to Logistics & Supply Chain Management 4

 Role of Distribution Operations in
Supply Chain Management

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

Intro to Logistics & Supply Chain Management 5

 Role of Distribution Operations in
Supply Chain Management

• Other valuable roles

Intro to Logistics & Supply Chain Management 6

 Role of Distribution Operations in
Supply Chain Management

• Functions of a distribution facility: Accumulation

– The DC serves as a collection point for product coming from
multiple origins and provides required transfer, storage, or
processing services
– The accumulation function allows organizations to consolidate
orders and shipments for production and fulfillment processes

Consolidation: collecting smaller shipments

to form a larger quantity in order to realize
lower transportation rates. (Source: John J.
Coyle, Edward J. Bardi and C. John Langley,
Management of Business Logistics, 6th ed.
(Minneapolis, St. Paul: West Publishing Co.,
1996) glossary))

Intro to Logistics & Supply Chain Management 7

 Role of Distribution Operations in
Supply Chain Management

• Functions of a distribution facility: Sortation

– Sortation focuses on assembling like-products together for storage
in the distribution facility or for transfer to customers
– During the receiving process, goods are segmented according to
their key characteristics
– product lot number
– stock-keeping unit (SKU)
– case pack size
– expiration date

Intro to Logistics & Supply Chain Management 8

 Role of Distribution Operations in
Supply Chain Management

• Functions of a distribution facility: Allocation

– The allocation function focuses on matching available inventory to
customer orders for a SKU
– Break-bulk capacity promotes product availability for multiple
customers and allows them to purchase needed quantities rather
than an excess volume that is not desired

Break-bulk: The separation of a consolidated bulk load

into smaller individual shipments for delivery to the ultimate
consignee. The freight may be moved intact inside the trailer,
or it may be interchanged and rehandled to connecting carriers.
(Source: John J. Coyle, Edward J. Bardi and C. John Langley,
Management of Business Logistics, 6th ed. (Minneapolis,
St. Paul: West Publishing Co., 1996))

Intro to Logistics & Supply Chain Management 9

 Role of Distribution Operations in
Supply Chain Management

• Functions of a distribution facility: Assortment

– Assortment involves the assembly of customer orders for multiple
SKUs held in the distribution facility
– Facility provides a product mixing capability, allowing customers to
quickly order a variety of items from a single location

Product Mixing: Products arriving from different

suppliers are mixed into the precise combination
for the relevant customer and continuously
provided for the product mixture shipments
requiring these.
Source:
http://www.expat-group.com/engineering/warehou
sing-
functions.asp

Intro to Logistics & Supply Chain Management 10

 Distribution Planning & Strategy

• Develop distribution strategies that are tailored to the products

being handled, customer requirements, and available internal
expertise and resources aiming to achieve lowest total cost

Intro to Logistics & Supply Chain Management 11

 Distribution Planning & Strategy

• Capability Requirements: Product Characteristics

– must drive the design of the distribution process such as product
value, durability, temperature sensitivity, obsolescence, volume,
and other factors

Intro to Logistics & Supply Chain Management 12

 Distribution Planning & Strategy

• Capability Requirements: Product Flow

• Direct shipping (manufacturer to • Indirect shipping (use of distribution
retailer or retailer to consumer) facilities)
– Avoids distribution facilities – Includes traditional warehouses,
– Aims to reduce inventory in the distribution centers, and cross-
system docking facilities
– Reduces overall warehousing – Reduces overall transportation
cost cost
– Often compresses order cycle – Holds goods in anticipation of
time orders
– Works well for customer when – Provide a buffer of safety stock
orders are made for truckload – Works better for customer when
quantities orders are made for small
– Works well when the product is a quantities
perishable or innovative good – Product mixing is available to
give customers a variety of items
Must analyze the inventory, transportation, and toservice
buy tradeoffs before choosing
Intro to Logistics & Supply Chain Management 13
 Distribution Planning & Strategy

• Network Design Issues: Inventory Positioning

– where inventory should be located, i.e. Single location versus
multiple-facing locations
Factors to Consider
Factor Centralized Decentralized
Substitutability Low High
Product Value High Low
Purchase Size Large Small
Special
Yes No
Warehousing
Product Line Diverse Limited
Customer
Low High
Service

Intro to Logistics & Supply Chain Management 14

 Distribution Planning & Strategy

• Network Design Issues: Number of facilities & location of facilities

Intro to Logistics & Supply Chain Management 15

 Distribution Planning & Strategy

• Network Design Issues: Number of facilities & location of facilities

– Facility location strategies:
– Market-positioned strategy
– Warehouses close to customers to maximize distribution
svcs & improve transp. economies of scale
– Product positioned strategy
– Close to supply source for firm to collect goods &
consolidate
– Intermediately positioned strategy
– midway between supply source & customers when
distribution requirements are high & product comes from
various locations

Source: Wisner et al., 2012

Intro to Logistics & Supply Chain Management 16

 Distribution Planning & Strategy

• Network Design Issues: Facility Ownership

– Public versus Contract versus Private

Intro to Logistics & Supply Chain Management 17

 Distribution Planning & Strategy

• Network Design Issues: Facility Ownership (owning versus renting)

Public warehousing costs are mostly all variable
Private warehousing costs have higher fixed cost
 private warehousing requires a high and constant
throughput volume to justify the capital investment

Intro to Logistics & Supply Chain Management 18

 Distribution Planning & Strategy

• Network Design Issues: Facility Ownership

– Rationale for Public Warehousing
√ Limited capital investment
√ Flexibility − Public warehousing rates
based upon:
√ Value
√ Fragility
√ Potential damage to
other goods
√ Volume & regularity
– Public warehousing regulation:
√ Weight density
√ Liability
√ Services required
√ Receipts

Intro to Logistics & Supply Chain Management 19

 Distribution Planning & Strategy

• Network Design Issues: Facility Ownership

– Contract Warehousing (3rd-Party Warehousing)
Customized version of Public Warehousing
Advantages:
 Compensation for seasonality in products
 Increased geographical coverage
 Ability to test new markets
 Managerial expertise and dedicated resources
 Less strain on the balance sheet
 Possible reduction of transportation costs
 Specialized contracted services, such as labeling, packaging,
light assembly, quality assurance, fulfillment facility,…

Intro to Logistics & Supply Chain Management 20

 Distribution Planning & Strategy

• Facility Considerations: Facility Layout

Intro to Logistics & Supply Chain Management 21

 Distribution Planning & Strategy

• Facility Considerations: Product Slotting

– Proper placement of the product in the facility
√ by popularity of item
√ by unit size of item
√ by cube (variation of unit size)

Product slotting: the intelligent location of product in a warehouse or distribution center for the purpose
of optimizing material handling efficiency. Sometimes called inventory slotting, or profiling, it identifies
the most efficient placement for each item
In a distribution center or warehouse.

Source: http://www.ceilogistics.com/Solutions/product-slotting.htm

Intro to Logistics & Supply Chain Management 22

 Distribution Planning & Strategy

• Facility Considerations: Product Slotting

– Advantages
√ improve labor productivity
√ 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

Intro to Logistics & Supply Chain Management 23

 Distribution Planning & Strategy

• Facility Considerations: Product Slotting

– Advantages
√ 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

Intro to Logistics & Supply Chain Management 24

 Distribution Execution

• Product handling

Intro to Logistics & Supply Chain Management 25

 Distribution Execution

• Support functions
– Inventory control
– Safety, maintenance, and sanitation
– Security
– Performance analysis
– Information technology

Intro to Logistics & Supply Chain Management 26

 Distribution Execution

• Order picking

Intro to Logistics & Supply Chain Management 27

 Distribution Execution

• Increasing effective capacity

– Utilizing warehouse’s cubic capacity

Cubic capacity: ratio of the storage

space (where materials are stored on
the floor), divided by the total cubic
volume of the portion of the building
occupied by the storage.

Source: http://72.14.235.132/search?q=
cache:tIQzSvHCgPcJ:www.warehousecoach
.com/images/21.doc+%22cubic+capacity%22+
warehouse&cd=3&hl=en&ct=clnk&gl=vn

Source: The Management of Business Logistics A Supply Chain Perspective, 7e

Intro to Logistics & Supply Chain Management 28

 Distribution Metrics

Customer Facing Measures

\
– Order accuracy and order completeness
√ Customers want to receive the exact products and quantities
ordered, not substitute items, incorrectly shipped items, or
wrong quantities
– Timeliness is a critical component of customer service
– Perfect order index (POI)
– To be considered a perfect order, the right items must be:
– delivered to the right place
– at the right time
– in defect-free condition
– with the correct documentation, pricing, and invoicing

Intro to Logistics & Supply Chain Management 29

 Distribution Metrics

• Internal Measures
√ Distribution cost efficiency
√ Aggregate cost efficiency
√ Asset utilization
√ Resource productivity
√ Resource efficiency

Intro to Logistics & Supply Chain Management 30

 Distribution Metrics

Intro to Logistics & Supply Chain Management 31

 Distribution Technology

• Warehouse Management Systems (WMS)

Source: The Management of Business Logistics A Supply Chain Perspective, 7e

Intro to Logistics & Supply Chain Management 32

 Distribution Technology

– Warehouse Management Systems

– software control system that improves product movement
and storage operations
– helps achieve high level of control, inventory accuracy, and
productivity through direct picking, direct replenishment, and
direct put-away

− value-added capabilities
 generate performance reports
 support paperless processes
 enable integration of materials handling equipment
 picking systems
 sorting systems
 leverage wireless communication
 labor management
 task interleaving
 systems integration
 activity-based costing/billing
 multi-function distribution

Intro to Logistics & Supply Chain Management 33

 Packaging

• Roles of Packaging
– when customized, packaging can provide another level of
product differentiation sought by customers
– protects the integrity and quality of the goods (protection)
– its design impacts an organization’s ability to use space and
equipment more effectively (unitization)
– ease of handling during materials handling and transportation
– provides information about the package contents
– helps to apportion the contents into servings or individual
selling units
– information about the product (UPC barcode, manufacturer,
distributor, ingredients, weight,…)

Intro to Logistics & Supply Chain Management 34

 Packaging

• Packaging factors influencing materials handling and storage

– Packaging materials
– Product characteristics
– Cube utilization
– Unitization
– Rigid containers (containers)
– Flexible containers (pallets, slip-sheets, shrink-wrap)

Intro to Logistics & Supply Chain Management 35

 Packaging

• Cube utilization
– benefit of modular packaging

Intro to Logistics & Supply Chain Management 36

 Packaging

• Cube utilization
– basic pallet master carton stacking patterns
• Flexible containers

Intro to Logistics & Supply Chain Management 37

 Packaging

• Rigid containers
– Improves overall material movement efficiency
– Reduces damage in handling and transit
– Reduces pilferage
– Reduces protective packaging requirements
– Provides greater protection from environment
– Provides a shipment unit that can be reused many times
– reduces waste and need to dispose the container

Intro to Logistics & Supply Chain Management 38

 Packaging

Intro to Logistics & Supply Chain Management 39

 Summary

• What did you learn in this topic? Summarize.

• Challenge Questions for Topic 7:

 (1)
 (2)

Intro to Logistics & Supply Chain Management 40