Reinventing the Warehouse: World Class Distribution Logistics - Hardcover

Harmon, Roy L.

Hardcover

ISBN 10: 0029138639 ISBN 13: 9780029138632

Publisher: Free Press, 1993

Synopsis

Describes an approach to warehousing designed to maximize the use of manpower, facilities, and equipment, and looks at new techniques developed by fifty companies around the world

About this title

About the Author

Roy L. Harmon, coauthor of Reinventing the Factory (The Free Press, 1990) and author of Reinventing the Factory II (The Free Press, 1992), founded Andersen Consulting's factory productivity practice and provides advice to its clients throughout the world.

Excerpt. © Reprinted by permission. All rights reserved.

Chapter 1

Management Perspective

Goldmine of Opportunities

Visionary executives have the power to rationalize costs and lead times in their logistics networks radically. In fact, pursuit of gargantuan improvements in the production pipeline has become a way of life for all major producers. Reduction goals of 90 percent of pipeline inventories and lead times are now relatively common, especially among the most dynamic industry leaders. Nor must customer service, product value, or quality of life be sacrificed on the altar of productivity. In fact, quite the contrary is true! Magnificent strides in adopting the best productivity methods has proved that magnificent strides can be made simultaneously in productivity improvement and in customer and employee benefits, and vice-versa. Goal-setting is a vital milestone on the trip into the twenty-first-century logistics world. Executive management, determined to excel and willing to support every action required to turn goals into self-fulfilling prophecies, must initially set new goals far above those of the past. Recent laudable achievements fall in the range of the following improvement percentages.

* 50% customer service lead time
* 50% space occupied by warehouse and distribution facilities
* 25% personnel costs
* 50% inventory investment in the logistics and production pipelines
* 25% logistics transaction (receipts and issues, for example) processing costs
* 75% better inventory record accuracy
* 75% fewer damaged and defective goods

Unfortunately, hampered by seemingly insurmountable barriers such as demand seasonality, inaccurate forecasts, and vendors convinced that they must have long lead times, progress in overall distribution improvement has been less dynamic than in the production operation logistics network. Dogmatic acceptance of the conditions that dictate modes of operation only perpetuates inefficient operations, the costs of which are passed on to the consumer.

Lest North Americans unduly chastise themselves for not having previously seen such mammoth opportunities, they should remember that their distribution and retail operations are still the best in the world, far surpassing those of the Japanese and Europeans, for example, in terms of distribution costs added to consumer prices. Nor should countries lagging behind North America be discouraged that their starting point is behind that of the American model. Their improvement potential is for that reason all the greater.

The keys to success in logistics management are no different from those already found in the production arena. It is vital to understand that no single magic bullets (quality programs or employee empowerment, for example) can transform a logistics network from merely state-of-the-art system to truly superior status. Hard work and attention to myriad details cannot be avoided. In fact, the siren song of employee involvement has led some executives and managers to believe that everyone else in the company will do everything necessary. Nothing could be farther from reality. Mike Budd, President of the Northridge Manufacturing Group of Harman International Industries, Inc., has said that he appreciates the need for employee empowerment but also believes it necessary to find a perfect balance between the consensus of small groups and dictatorial management. The author concurs. It is folly for management to abdicate its responsibility for knowing what is most important for the company and leading its march into the future. No army advance should be permitted to become an uncontrolled, undirected, fragmented, multidirectional movement. This, however, would be the consequence of empowering each platoon to decide its own direction! The result would be chaotic. No less is true of a company's assault on progress barriers.

In lieu of magic bullets, there is a finite list of the components of a superior logistics network. The first milestone on the journey to superior status is the successful formulation of a vision of future logistics. The vision will guide preparation of route maps for the sundry activities necessary to achieve it. That there is a crying need for improvement is not in doubt, for, as Duncan wrote, "To a great extent, the very fate of humanity depends on people's ability to effectively manage resources, time and energy -- all of which seems in too short supply."

EXECUTIVE SUMMARY: KICKING SACRED COWS

Reader beware! The author delights in kicking everyone's sacred cows. In many cases, the cow-kicking shock treatment is tongue-in-cheek, intended to shock the executive-timber mover-shakers into challenging the dogma of the near and distant past by opening splendid new vistas of opportunity to their fertile minds. The author has no corner on vision or imagination. Most executives will be able to cast apocalyptic predictions of future logistics that are far superior to those of the author. However, to do so requires a mindset in which sacred cows are not permitted to be barriers to progress.

Often the author purposely ignores some logistics environments that occur in less than 100 percent of the various types of logistics businesses. It is easy to do so, in light of the extreme number of products moving through the distribution and production channels. He does not attempt to qualify every strong position with a face-saving statement that the concept might not apply in such-and-such a situation. The purpose here is to avoid the somewhat wishy-washy approach of saying that there are no absolutes, that every single element of distribution operations and systems is subject to a variety of approaches, or that there is always an extremely complex network of circumstances which, considered jointly, determines the "optimum" solution. It is no accident that the author's absolute suggestions are often based on a simplistic view of the world of distribution logistics. Contrary to some authorities on simple and complex problems and environments,3 the author, like Batten, views anything held to be complex to be simply a large collection of simple elements. The daily challenge at which all superior executives are (and must be) adept is reducing complex issues to their simple components, thus making simple solutions practical.

In many other cases the author strongly believes in seemingly impossible new scenarios that will be completely unrealistic in the eyes of many. Perhaps many have strong, valid reasons for their opposing beliefs, based on unique aspects of their own unique business environments, which the author may not have experienced. The author has great respect for the wisdom of his readers. Based on their own environments, most will be able to apply their own judgments as to which sacred cows are valid and which are not. Others of lesser flexibility might be inclined to toss out the baby with the bath water, rejecting any notion of deviation from existing dogma, and therefore ignoring the entire book's body of work. It is to be hoped that the tide of change will eventually lead those inflexible few to believe in the malleability of our environments. For only through the kind of major metamorphosis that transforms and eliminates environmental restrictions can epic breakthroughs be expected. Thus, the reality of the future vision depends on the executive's commitment to it and his willingness to do his own cow-kicking. True executives (leaders and cow-kickers) are easy to distinguish from managers. As Gardner writes, "Leaders and leader/ managers distinguish themselves from the general run of managers-They think longer term -- beyond the day's crisis, beyond the quarterly report, beyond the horizon.

Vision is the precursor of business strategy. Attaining the far-reaching limits of opportunity requires that the vision embody ful-fillment of seemingly impossible dreams.

A LOGISTICS VISION

Every business needs a farsighted vision of its operations, facilities, equipment, and products extending decades and even centuries into the future. As Kotter says: "With no vision and strategy to provide constraints around the planning process or to guide it, every eventuality deserves a plan. Under these circumstances, contingency planning can go on forever -- without ever providing a clear sense of direction that firms so desperately need today." No company is exempt from the myopia that tends to cast its future vision in terms of the present and past environment and only recent trends. Still, all businesses operate with myriad inefficiencies based on roadblocks that their markets and suppliers, and their own organizations and facilities, place in the way of traffic on the super-highway to superior operations, services, and products. Forming a logistics vision requires a unique frame of mind. Executives must hypothesize numerous seemingly impossible scenarios to be able to begin to see their ideal business emerge from the mists that past experience has placed between them and the utopian situation that will eventually predominate. Here is a sampling of just a few of these impossible scenarios:

1. Suppliers will cut their response time drastically and will deliver perfect quality, precisely on schedule.
2. Customers at all levels of the logistics network will routinely share reasonably accurate short- and intermediate-term projections of their needs (schedule) with their suppliers via electronic data interchange. They will update the information as quickly as changes become necessary. This will radically reduce wild and unexpected demand swings.
3. Seasonal peaks and those within a week or month will be radically reduced since to do so is in the economic interest of everyone in the production, distribution, and consumer supply and demand chain.
4. Rote business practices and government-imposed reporting requirements that drown businesses in a veritable ocean of costly paperwork and systems can and will be replaced by practical, low-cost, fail-safe methods for achieving the same ends.

One factor, more than any other, will radically change the logistics mission for the better. This factor is the blossoming of production facility clusters in the center of regional market areas. The present outmoded logistics model primarily transports materials, components, and finished products from their production sources to market. Since the sources are often hundreds of miles from their markets, the model demands significant expenditures in transport and logistics facilities. State-of-the-art producers already know that better modes of transportation and warehousing are only temporary patches on a defective industrial infrastructure. They have seen persistent notions of economies of scale lead many companies to build giant single-location production facilities, remote from many suppliers and from large segments of regional, national, and international markets. The best suppliers, however, have seen that the break-even point for production facilities can be far less than dreamed. Therefore, building small, focused production facilities in the midst of market concentrations, thus reducing transportation and warehousing facilities between producers and their markets, is entirely practical. My colleague Leroy Peterson reminded me, at this juncture, to mention again the absurdity of multiplant producers' far-flung networks of production facilities.8 Many such companies' networks permit materials and components to crisscross continents and oceans, putting thousands of transport miles into final products' costs even before the cost of transportation to market is incurred. Slashing these exorbitant logistics costs in the supply network is every bit as important as in distribution.

Although the exact same economies apply, few producers have expanded their production supply visions and strategies to encompass the scenario of suppliers (vendors and each supplier's own factory network) who also build new facilities in the vicinity of their regional factories. As these visionary dreams increasingly become reality, vast numbers of trucks will disappear from the highways, and ships in the world's sea lanes will be reduced to those carrying primary raw materials, fuels, and agricultural products, for there is no enduring, economically justifiable rationale for any country or regional groups of countries to import manufactured goods. The author has seen that identical small, focused factories can produce with equal productivity in any two countries of the world. The primary difference in their costs is not man-hours worked, but the cost of those hours. Therefore, as fast as living standards of all countries are raised to equivalent levels, people of newly developed nations will be able to afford the products they produce, and the need to export to richer countries will plunge.

New, world class distribution logistics will require management to adopt stringent new twenty-first-century ideals as the basis of their visionary targets for systems, transportation, and warehousing operations. The logistic network ideals to which every company should aspire include the following:

1. Real-time electronic transmission to suppliers of retail customer (or original equipment manufacturer) consumption as it occurs. The purpose of the transmission is to trigger lightning-fast replenishment of the inventory consumed. In ideal circumstances, the supplier will immediately pick the replenishment from stock and load it on a truck for same-day delivery.
2. Electronic transmission of projected customer demand as far into the future as the customer is able to provide. The inventory consumption transmission can only trigger replenishment picking and delivery if an earlier forecast transmission caused the supply network to make the item consumed available at the end of the pipeline of factories and warehouses. The demand-forecast transmission does not trigger immediate delivery. It controls the valves that meter the flow of material and goods through the pipeline. In other words, it must release production at the start of the pipeline, timed to meet actual consumption at the end of the pipeline.
3. In combination, the consumption and demand-forecast transmissions are also used to schedule and control transport from the pipeline head, a basic material producing plant, through all subsequent production stages in both vendor and company factories, through distribution facilities, and into the customer's inventory.
4. The utilization of truck fleets (and their drivers) in every stage of the pipeline will be optimized to the extent practical within the constraints of the end customer's projected demand. Thus, tractors and trailers will be virtually in perpetual motion. Delays while awaiting loading and unloading will be slashed to the bare minimum. Not only will outbound trucks be loaded to maximum practical weight and cubic volume limits, but they will also return as fully loaded as practical. Consequently, the depreciation component of transportation cost and return on capital invested in tractors and trailers will be at near optimum levels.
5. The logistics network calendar of operations will be geared to maximum utilization of the facility and equipment investment, thus minimizing capital requirements. Operation of facilities and equipment seven days a week, twenty-four hours a day will not only reduce capital and operating costs but also will increase the speed of flow through the pipeline, lowering inventories throughout the network. Significant amounts of transport, loading, and unloading should be shifted to hours during which traffic is lightest. This will contribute to the reduction of time in transit.
6. Idle, immobile inventory in any stage of production or distribution wastes the company's available capital. Therefore, inventory not in motion must be reduced ceaselessly until near-continuous movement has been achieved. Supplier factories will deliver production directly to shipping docks where it will immediately be loaded on trucks for delivery to the next point in the production and distribution pipeline. The ultimate goal will be to eliminate the need for warehousing anywhere in the network, including between factories and between factories and customers.
7. Until the need for warehousing is eliminated, the logistics system will support and indeed encourage continuous reduction of warehouse inventories rather than perpetuate current levels. The factors that enable such a continuous reduction are as follows:
a. Continuous reduction of lead time in the entire pipeline. This permits faster replenishment of consumption as it Occurs.
b. Elimination of setup and ordering costs at both ends of the supplier-customer pipeline. Since these costs usually dictate an "economic" order quantity much greater than immediate needs, the resulting inventory is correspondingly higher than required to satisfy need. In the ideal environment of zero setup and ordering cost, one day's need should be delivered on the day (or even at the hour) required.
c. Improved transportation logistics. More frequent, smaller truckloads traveling between steps in the logistics network will reduce inventories at each point in the network while achieving a higher level of customer service.

SLS Sears Logistics Services, for one, has one of the most comprehensive visions of future logistics extant. Better still, for SLS the future is now! Its information network, transportation partners, and warehouses operate in a continuum, scheduling and delivering more than a-half-million truckloads through the pipelines that unite manufacturers, warehouses, and retailers in a robust, integrated network of superbly efficient business units. Until recently, SLS services were dedicated to Sears, Roebuck & Co.'s retail and catalog businesses. It has devoted decades and millions in developing logistics facilities and information and action systems, and it recently started a new program to move it into the ranks of the best in the world. State-of-the-art facilities, transportation management, and integrated systems of highest caliber have long been beyond the realm of practicality for businesses smaller than Sears. Recently, however, SLS has made provisions to offer the same advanced logistics services for enterprises outside the Sears family. Thus, the fruits of its massive ongoing investment and previous decades of development and operational experience are available to subscribers to these ultramodern logistics services and systems. For customers of SLS services, the costs of implementing and operating the turnkey package, therefore, are far lower than those of developing and operating their own systems, transport, and facilities. In fact, the cost to any business for developing and operating its own comparable capabilities are prohibitive, precluding all but the largest enterprises from doing so. And, aside from the issues of the initial cost outlay, it takes years, even decades, to achieve the same level of cost-effective performance.

VISIONS: FACTS OR IMPOSSIBLE DREAMS?

Vision formulation is an important, dynamic emerging business trend. Virtually every world class company's executives have brain-stormed a vision of their company's, customers' and suppliers' future environment and modes of operations. The vision is the precursor to laying the planning groundwork, which prepares the business to move into the twenty-first century. That companies are taking a longer-term view is the good news. The bad news is that few have been able to divine the difference between a true vision and a mere strategy, in terms of the time frame. The author has previously defined the time frame of tactical initiatives as short-term (this year) and of strategies as longer-term (this decade). The time frame of a vision must fall between very long-term and infinitely long-term to enable executives to cast off the imagination-imprisoning shackles of current realities. Strategies are the stuff of today's realities and limitations. Visions are the seemingly impossible dreams of limitless future opportunities. Incidentally, my colleague Bill Copacino provided invaluable insight into the mindset that inhibits many executives when they attempt to create a vision. While discussing one of the author's favorite hard-to-envision visions, Bill pointed out that some would ask where the data were to support (or to project) the likelihood of the vision coming to pass. The author's response was that true visions are not, and cannot be, merely projections of past history and trends. Devanna and Tichy, in describing the reason executives and managers find it difficult to create revolutionary strategic plans (visions) write:

Managers are not encouraged to fantasize and visualize. They are encouraged to use analytical financial, marketing and production skills -- those supported by only left-brain activities. Even the strategic planning process in most organizations is a linear, left-brain activity that does not lead to a vision of a future state but rather results in an extrapolation of current market share, return on investment, or production figures several years into the future.

For example, a few short years ago the Western world's strategy vis-à-vis the Soviet Union was one of containing the dangerous, threatening spread of communism by maintaining a military deterrent to aggression. Massive strategic military investments were therefore devoted to that end, and government investment in any alternative vision was nil. Strategic investment, by industry and government, in anticipation of commercial activity in the Soviet bloc was virtually nonexistent. If only a handful of influential visionaries had had the audacity to dream the impossible dream, that of the lightning-fast fall of the "evil empire," Western governments might have channeled at least some funding into programs for preparing to assist the newly democratized nations in making the leap from centrally mismanaged economies to free, capitalistic markets, with a modicum of painful cycles of shortage and inflation. Industry, given the vision of new freedom, could have developed its own strategies for rushing in to participate in the modernization of the new consumer society. They would have researched the opportunities for joint endeavors with existing enterprises, studied the market potentials of the vast expanse of the former U.S.S.R. and its minions, and mastered the knowledge of cities with the transportation, logistics, and utility infrastructure necessary to support the development of new and improved enterprises. Such relatively low-cost preparation, with help from government intelligence agencies, would have prepared industry to unleash profit-motivated investment, benefiting not only the investors but also the enterprises and people of the new nations. The pains of transformation would have been minimized, and the rapid commercialization of new market-oriented production and logistics would have provided earlier profits for all.

The key to developing a true vision is to cast aside all constraints, emphasizing the "impossible" conditions that, once achieved, will permit changes that lead to quantum improvements in the productivity of production and distribution, for the benefit of the populace of the entire world. For one small example of conditions that are "impossible" to change, consider the demand peaks and valleys caused by real and man-made seasonality, and those of day-of-week and time-of-month. Demand valleys put hordes of people in unemployment lines in off-season periods, crowd retail facilities to unbearable levels during peak sales days and seasons, and overflow warehouse capacity as production is amassed for seasonal peaks, while the same warehouses are vast, costly caverns of emptiness in periods following the time of peak demand. Thus, having an "impractical" vision of a world in which radical demand variations are virtually eliminated is a practical way to start to see that the huge benefits warrant initiatives that will eventually produce the changes needed to bulldoze market demand into reasonably level, stable requirements. Once the impenetrable barriers blocking the path to ideal logistics and production are hypothetically deemed to be movable, inventive minds are freed to soar to incredible heights, and solutions to "impossible" blockades begin to cascade forth. Suddenly the "impossible dream" (vision) starts to become reality decades, even centuries, earlier than deemed possible by even the wildest dreamers. The inventors of the world can start to apply today's practical technology and resources to tomorrow's vision and make tomorrow happen today!

Executives who have had the exhilarating experience of developing real visions have nevertheless found that not all visions are within the practical realm of any single company, executive, or industry to achieve. In fact, some of the most important, necessary drivers of change will be major new national and international laws to govern world trade in rough balance between nations. Since government bodies move with glacial slowness, often with many moves in directions opposite to those necessary and desirable, the earliest strategies to emerge from the process of developing magnificent visions will be those of the most mundane practicality. Nevertheless, a mind-boggling logistics vision will be the framework of the quantum advances that will occur in the twenty-first century!

VISION-STRATEGY-TACTIC

The logistics vision, spanning decades or even centuries, as shown in Exhibit 1-1, encompasses dreams that go far beyond the practical scope of a business's or government's immediate action agenda. Therefore, strategies that flow from the vision are action-able, major initiatives that require several years to come to fruition. For example, a logistics vision would encompass long-term creation of numerous national and international clusters of supplier, production, and distribution facilities in every regional market area. A practical strategy would be to concentrate work in early years on achieving near-ideal clusters in one or two of the largest market regions. However, the troops in the trenches need more specific goals and objectives to drive their tactics in the coming year. Their tactics therefore, would be to locate local supplier/partners in the target region for some important goods and/or components, to work with some distant suppliers to establish production facilities in the region, and to start building the new distribution and production facilities appropriate for the cluster.

This is not to say that some feasible strategies will not come to full fruition beyond the decade time frame. For example, the author's vision is one in which businesses take a much more active role in government and industry associations. The most worthwhile pursuits of industry associations will be those directed at making visions come to pass. Government must create initiatives that will be mutually beneficial to consumers and business. For the common perception of business as an evil entity of a malevolent, wealthy handful of owners is false. We the people, through widespread, direct stock and mutual fund holdings and indirect ownership through our company and private insurance and pension plans, are the majority owners. Our most capable leaders are people in the industries owned by the people. Yet, because they work full-time at their jobs, few have the local, state, national, and international involvement necessary to bring their competence to bear on government operations. Companies must have the vision to invest some of their best executives', managers' and employees' time in government activities.

STRATEGIES FOR THE TWENTY-FIRST CENTURY

Most warehouses and storerooms are much larger than they need to be to store the present levels of inventory. This may be hard to understand when one sees pallets stocked in aisles and every other available nook and cranny but will be easier to understand after reading the section in Chapter 4 titled "Maximizing Warehouse Space Utilization." However, the more important issue for strategic planning purposes is to recognize that radical improvements in the supply, manufacturing, and distribution pipeline will revolutionize the amount of warehouse space required to meet significantly improved levels of customer service. Therefore, the challenge to executive management will be to move toward or to stay in front of the leading edge by implementing vendor, factory, and warehouse improvement programs for adopting new technologies that will achieve those ends. Given these improvement programs, management can start to develop strategies for reducing the excess warehouse capacity, and those strategies will evolve continuously as improvement programs progress throughout the distribution and supply network.

TRANSPORT LOGISTICS: KEY TO SLASHING INVENTORY

A long-term vision, from which shorter-term strategies for revising transport logistics will emerge, will be one key to companies' drives to slash inventories in the logistics distribution and supply pipeline radically. Depending on the size of transport vehicles now in use and the frequency of trips between supplier and customer, revised transport logistics has the potential to reduce pipeline inventory by as much as 90 percent. (This despite the recent fantastic reductions of transport costs stemming from the deregulating Motor Carrier and Rail Acts of 1980.) The size and frequency of trucks (and other forms of transport) traveling between links in the logistics chain has a direct impact on the amount of inventory in the pipeline and the speed with which the average item travels. For example, take a hypothesis in which every truckload received contains a supply of every item stocked equal to the demand until the next truckload is received. The average theoretical inventory of both supplier and user can be no less than one-half truckload plus safety stock, for each, in this example. Hence the pipeline inventory for a single user-and-supplier combination would be one truckload plus the average number of truckloads in transit and safety stocks of each. If the frequency of delivery can be changed from weekly to daily, the pipeline inventory would therefore be cut 80 percent. Further, reducing the size of the daily truckload to one-half of its former volume (by using smaller trucks) makes it possible to change deliveries from daily to twice daily, thus increasing inventory reduction to the 90 percent level. Thus, an important part of every company's vision and strategy should be to strive to find ways to increase delivery frequency and reduce the size of loads. Chapter 2 outlines some ways to achieve these goals under the heading "Transport: The Pipe in the Pipeline."

Many readers who are deeply involved in logistics management will note a large gap in transportation modes discussed in this book. Railroad and water transport are not discussed in any depth because they are typically slower than truck transport, so the pipeline inventory is high and responsiveness to demand changes is slow. Rail and water seem to be most suitable for products and materials of great weight, low unit cost, and homogeneity of form, size, and shape. For example, over 80 percent of tonnage hauled by rail consists of coal, minerals and ores, farm products, chemicals, and food.

Further, although contract carrier services have been a fantastically successful component of gains in the 1980s, the author deems the most important new services to be company-owned and company-managed services. Since deregulation has made it possible for company fleets to contract backhaul services, private fleets now have no serious impediment to competing with common carriers or, for that matter, with contract carriers with respect to backhaul. As Bowersox and his colleagues have said, "The flexibility and economy of a private truck operation, customized to the needs of a particular shipper, are difficult for a common carrier to match."

INVENTORY REDUCTION: THE ULTIMATE SOLUTION

The pipeline of supply between producer and consumer would be shortest and least costly and would require the lowest investment if only it were feasible to deliver production directly to consumers, with fewer intervening tiers of warehouses. However, most products are burdened by market and production realities that dictate warehousing. Thus, although most companies will find it impossible to eliminate warehousing, all must realize that through better control and by moderating the circumstances that necessitate distribution inventories, they can drastically reduce the investment while maintaining or improving customer service.

Certain market conditions force companies to stockpile -- for example, seasonal peaks and valleys of such great magnitude that producing to demand is impractical. In that case, companies must produce to inventory (warehouse) in advance of the seasonal sales surge. Products of moderate seasonality are sometimes almost as difficult to produce when demand occurs as are those of radical peak sales. Virtually no product exists for which there is no variation in sales from period to period. Further, the variation in demand from one period to another is virtually impossible to forecast with any reasonable degree of accuracy. Companies meet the uncertainty of forecast demand by providing a cushion of higher-than-needed warehouse inventories. Those cushions are commonly termed "safety stock." Scientifically managed inventories correlate the amount of safety stock and the amount of time between reordering and subsequent receipt. The reason is that the longer the time required to replenish low stock levels, the more severe the deterioration of customer service is likely to be over that period. Equipment and manpower capacity limits and capacity variation are the most common production conditions that force the use of warehousing to meet sales demand as it occurs. For example, worker capacity is also subject to seasonal variation. Absenteeism increases in the winter influenza season and during hunting and fishing seasons, while entire factories and warehouses shut down operations for vacations.

The bad news is that these realities exist and will not completely disappear. The good news is that dynamic managements can plan and execute changes that will cause inventory investment to plummet. One such change would be to reduce sharply inventory replenishment lead time. Because lead time and safety stock quantity should correlate, slashing lead time should be accompanied by drastic reductions in theuent receipt. The reason is that the longer the time required to replenish low stock levels, the more severe the deterioration of customer service is likely to be over that period. Equipment and manpower capacity limits and capacity variation are the most common production conditions that force the use of warehousing to meet sales demand as it occurs. For example, worker capacity is also subject to seasonal variation. Absenteeism increases in the winter influenza season and during hunting and fishing seasons, while entire factories and warehouses shut down operations for vacations.

The bad news is that these realities exist and will not completely disappear. The good news is that dynamic managements can plan and execute changes that will cause inventory investment to plummet. One such change would be to reduce sharply inventory replenishment lead time. Because lead time and safety stock quantity should correlate, slashing lead time should be accompanied by drastic reductions in the lead time portion of safety stocks. And, in the event that a company's forecasting and inventory management systems do not provide the data with which to minimize forecast inaccuracy and maximize the accuracy of safety stock calculations, new, improved software may also be a vital ingredient of management's broad array of tools and tactics for improving warehouse operations. A company's factories should rank manufacturing lead time compression close to the top of its priority list. In addition, the company's warehouses and factories should also have an aggressive vendor program with the same emphasis on manufacturing lead time compression. Dramatically increasing the frequency of deliveries from the warehouse's own factories and from its vendors, however, usually has the greatest inventory reduction consequences.

DISTRIBUTION AND SUPPLIER NETWORKS: STRATEGY FOR SUCCESS

In this day of space-age computer and communications technology, the painfully slow transfer of demand and inventory replenishment data from point-of-sale back through the distribution channels to the product supplier, and on to the suppliers of components and materials is woefully archaic for all but a handful of leading-edge companies. In many steps of the demand update chain, Exhibit 1-2, companies forward only order information to their suppliers. Their suppliers, lacking their customer's forecast and inventory status data must therefore operate in semidarkness, forecasting the customer's demand themselves, or trying to react to it with reorder-point inventory control systems. Further, some links in the chain still operate weekly replenishment systems. When a customer's demand (schedule or order) arrives immediately after a weekly processing cutoff date, transmission of its effect is delayed until the next weekly process. Little wonder that it sometimes takes several weeks to pass demand data from point of sale all the way back to the start of the supply chain. The delay in passing data through the chain causes a tremendous information gap. By the time the lowest-tier producers receive data with which to schedule production, they are woefully outdated. Nevertheless, they are the only data available and must be used. As a result, some factories continue to work full blast well into business recessions then lag far behind market recovery, hampering the return to normal production levels. Worse, the delay in turning up production volume causes shortages that in turn trigger price increases and start an inflationary spiral that, short of another business downturn, is almost impossible to check. Even in normal times, the delay causes the lowest tier to be working continuously on the wrong priorities, producing more of items for which demand has fallen and less of those for which demand has risen.

Further, some links in the demand update chain still use old-fashioned media and communication technology. For example, many companies still pass paper orders through the mail or, at best, via facsimile. Conversely, leading-edge companies have already eliminated the labor-intensive order creation process and the need for suppliers to key enter order data. Instead, they use electronic data interchange to pass information in their own distribution or supply network and do so with a system that maintains inventory and demand data for every link in the company's chain. In distribution companies this type of system is commonly called a distribution resource planning system. Very few companies have taken the inevitable step of linking every company and every entity in the network with a single better demand planning and replenishment system. Strategy #1, therefore, is to get to work on the network-wide system. The first step in doing so is for a company to implement the system in its own distribution and production facilities, with linkage to their first-tier vendors a second high priority. Later phases would add additional supply network tiers to the already operational system.

In the author's vision, economic downturns will be moderated as a by-product of the new electronically linked networks. Entire national economies will therefore benefit from the lightning-fast transfer of demand data through all tiers of the network. Early systemwide awareness of business downturns, on the part of business and government executives, should serve to alert not only business but also governmental economic controllers such as the Federal Reserve Board that remedial action is required. And systemwide visibility of business upturns should also serve to synchronize all businesses in turning up their production volumes, thus helping to avoid the inflationary spirals that so often accompany vigorous recoveries.

Companies with repetitive demand that still use either paper or electronic orders should adopt the longer-term strategy of replacing orders with schedules, as will be outlined in Chapter 5. However, it is even more urgent that the physical network be simplified and rationalized. Strategy #2, therefore, must have minimization of the number of levels in the distribution and supply chains as its goal. (The strategy number used here is not a priority number. Operational improvements are always of highest priority). Astute executives, seeing the lengthy demand update chain Exhibit 1-2, undoubtedly will have questioned the necessity of such a long chain. In fact, the fastest way to achieve the speediest delivery through the network is to eliminate as many stops along the route as possible. Further, numerous links in the chain may be in far-flung corners of the country or world. In these cases, even more time and effort are required to maintain demand information links. Worse, because of the wide transport distances between links, the lowest-tier producers may need to produce several weeks or even months in advance of actual end-of-pipeline sales. The best way to ensure high levels of demand service with minimum inventory and lowest possible transport cost is to eliminate overseas sources by establishing local clusters of distribution facilities and supply factories. Strategy #3 is to establish local clusters. The supplier program is a vital component of the cluster strategy, because it helps a company and its supply chain establish permanent bonds with strong local vendors and persuades many remote suppliers to establish a small, focused factory in the regional cluster.

Some elements of the logistics vision are so fundamentally advantageous but so contrary to traditional practice and conventional wisdom that accepting them will require mind-boggling imagination. One such example is elimination of middlemen in distribution channels.

ELIMINATE THE MIDDLE-MAN

Why should dealers, distributors, and retail establishments be interjected between producers and customers if they add cost to the price of the product? (And they certainly do add cost!) One reason, traditionally, was to provide a local source from which the customer could obtain instant delivery. A second reason was to provide a convenient place at which the customer could see and touch the products in which he had an interest. Yet another reason was that a local outlet or distributor could be a fast, convenient provider of repair parts and services. The seven-league strides producers and distributors are making are eliminating all these justifications for continuing past practices. These strides include (1) drastic reductions in the supply, production, and distribution pipeline; (2) instantaneous, on-line order entry and same-day order shipment; (3) local clusters of suppliers and company factories; and (4) short, fast, low-cost transport.

The author has long held that dealers and retailers of such big-ticket items as automobiles and appliances are no longer necessary. In fact, if General Motors were to become the first producer to establish factory-to-driver sales and delivery, it would catapult the company to reclamation of its previous predominant market share. It could do so by lowering prices of its automobiles to a point far below it competitors' (at least temporarily, until other suppliers adopted this new away of doing business). Such a move would eliminate billions of dollars that dealers carry in inventory (the cost of carrying this inventory is passed along to the retail customer) and replace it with a much smaller inventory in the assembly plants' yards. Modern systems and transport methods should enable the factory to deliver inventoried automobiles in one to three days. It will be practical to deliver cars produced to customer specifications in five to ten days since large orders for dealer inventories will no longer delay individual customer orders for custom vehicles.

In the short-term, direct-to-customer world, General Motors might operate relatively compact facilities, consisting of a showroom and several interactive consumer-friendly computer terminals for on-line order specification and entry and funds transfer payment processing. The facility might also have a very small yard for unloading delivered, prepaid automobiles. Dealer preparation and its charges would be eliminated since this step would be performed either in production or when preparing the cars for shipment.

Properly handled, present dealers would be overjoyed to become instantly wealthy by selling their prime value real estate (empty sales lots), by eliminating their vastly expensive inventory of automobiles, and by focusing on the profitability of their lucrative service operations. (However, even the service operations will be radically changed, becoming do-it-yourself facilities as defined in Chapter 7. (In fact, in the short term many dealer showrooms and offices may be converted to be the order-taking computer terminal operations and showrooms. From the consumer's standpoint, the disgusting process of price haggling will be eliminated. Every customer will be able to take advantage of the standard direct-from-factory prices available to all. No longer will customers worry whether or not they have haggled as successfully, achieving as low a price, as have others.

Down the road, all of this will change as existing and new technologies and their continuing cost reductions bring the showroom into the consumer's home. Interactive big screen, high-fidelity cable television/computer systems with voice recognition and speech synthesizer will permit the consumer to "visit" all the dealer's "showrooms" without leaving his easy chair and, after deciding on the car, conclude financial arrangements and order processing through interaction with bank and factory computer systems. (Obviously, many buyers will continue to want to test drive and otherwise view the products. For these customers, producers will undoubtedly maintain minimal facilities, which will include all of the electronic catalog and order entry facilities. Thus, less advantaged individuals who do not have home systems will have a place at which they can also take advantage of them.) The savings to the consumer will not end with price reductions. Consider, for example, the benefits to the environment. The reduced volume of traffic to and from retailers and dealers will yield additional savings in the world's fuel bills while slashing air pollution and relieving traffic congestion. Further, although armies of jobs will be eliminated, lower prices will enable consumers to buy more of the items they have previously thought of as luxuries. And time saved shopping will generate greater demand for leisure-time products and services. Thus increased demand, new services, and shorter work hours will ultimately offset jobs that would otherwise be lost through abolition of the middleman.

Being the biggest-ticket items, automobiles should lead the way, with such progressive appliance manufacturers as General Electric close behind. Soon after, the momentum of home ordering will expand in ever widening scope. Eventually, the space-age interactive home shopping and ordering systems will extend into the world of the supermarket, department store, and discount operations and, as the lowering of logistics costs progresses, will trigger a rebirth of home delivery service.

Although many will view these visions as outlandish and overly optimistic, belonging to a distant future era, progressive executives will see that the technologies are on the verge of practical application and will begin to develop pilot installations. These pilots might well be focused in small communities, where the small market would minimize the costs of pilot operations. If initial costs exceed benefits, the laboratory-type operation could be funded on the basis of its research and development value. The shining new future is slightly beyond the reach of our outstretched fingertips. It's time for the mover-shakers of the world to reach out and grab it, for the benefit of all!

SUPPLIER PROGRAM: A PARTNERSHIP VISION

Although the customer is or should be, king, the craftsmen (suppliers) are the only ones ultimately capable of servicing the wants and needs of the monarch. It is they who produce the valued products of timely availability that satisfy the desires of the customer at the end of the distribution chain. Too often, however, a seemingly bottomless credibility chasm exists between customers and their vendors. Simply stated, both customer and vendor seem incapable of mutual trust. Customers are wary of vendors putting something over on them, supplying shoddy products and giving other, larger customers preferential treatment in delivery and price. Vendors, accustomed to overnight loss of a valued customer's business to a competitor that lowballs prices, feel that customers have no morals. No matter how hard they work to serve a customer's every need, the customer will desert them at the first chance to save a few dollars.

The stakes of the successful vendor partnership are huge! Vendor process improvements in the twenty-first century have the potential for nationwide reduction of pipeline inventories by trillions of dollars, while the value/cost relationship of the products marketed at the end of the logistics pipeline can be doubled and redoubled. Unfortunately, the predominant vendor program is still one of "qualifying" vendors through the use of checklists and "measuring and evaluating vendor performance." Too few companies have realized that the barriers to partnership in profits between customer and vendor require battering down long traditions of adversarial relationships and replacing them with new eternal bonds of a mutually profitable relationship. After all, vendors and their customers must grow to prosper, and the most important key to growth is satisfying their mutual end customer.

WAREHOUSE AUTOMATION: FULL, SEMI-, OR MANUAL?

All of the components of a fully automated, cost-effective warehouse system are already available. However, virtually no one has integrated the components in such a way as to make an economically feasible system for warehouses that stock a virtually infinite variety of item shapes and sizes. Therefore, today's most highly automated systems are found in warehouses that stock items of reasonably homogeneous size and shape. Exhibit 1-3 is an example of an almost fully automated order-picking system suitable for picking relatively small orders of items such as pharmaceutical products, cosmetics, books, video tapes, etc. And although the system is not completely automated (warehousemen must replenish the product magazines, for example), it does not take too much imagination to envision a system in which suppliers deliver products in returnable magazines, loaded by the supplier's automated equipment, rather than packaged in cartons. Upon receipt of bar-coded magazines, a conveyor with bar code scanners could rout them to automated storage and retrieval systems, where they could be automatically transferred to the order picker as needed. The reason this type of system is not yet in place is not only that the cost of all required automation components is usually prohibitively high, or that too many companies have too wide a variety of package sizes. Another factor is the complexity of the complete integrated system. Most of today's best automation examples simply integrate numerous automated, semi-automated, and manual systems, in the sense of synchronizing the delivery of items on each order from the many storage areas.

Although it may be impractical to automate warehouse operations fully, every logistics executive should maintain competence in various forms of warehouse automation, including conveyance systems, storage and retrieval systems, computer controllers, hand-held and in-transit bar code readers and scanners, conveyance devices, and lift and transport equipment, to name a few. Even better, some small practical portion of the warehouse should be suitable for conversion to a small island of automation. Even if the operation is not cost-effective, the equipment required and the volume handled would be small enough so the investment could be viewed more as an investment for maintaining automation skills (and perhaps as a marketing tool for advertising the company's state-of-the-art automation).

The day will come when the costs of integrated, practical warehouse automation are within the reach of companies both large and small. The necessary disciplines and integration of both customer and supplier operations and systems will force solutions to problems such as damage-in-process and inaccurate inventory records. An automation vision is one important component of the complete vision logistics executives must create for their future operations.

MINIMIZE COSTLY TIME AND MOTION

When men and machines are in motion between times when they are actually performing work, unnecessary cost is being added to the process. In such cases, logistics operations are rich in opportunities for improvements. For example, empty and partially loaded trucks, tractors, and trailers are far too often in motion less than full time. Many companies and entire industries have made the mistake of designing and using specialized vehicles and containers that are extremely cost-effective in outbound trips but always return empty.

Exhibit 1-4 depicts examples of two-way transport in the warehouse and on the highway. In the forklift example, any time a trip is made into the warehouse to retrieve an item for issue, a receipt transaction requiring stocking in the same area is carried into the storeroom and stocked. Next, the forklift travels to the nearby item to be issued, retrieves it, and delivers it into the packing and shipping process. Although this example portrays forklift trucks, the objective of making all transport two-way loads is equally applicable to fully and semi-automated storage and retrieval machines and to stockkeepers pushing carts. In the bidirectional conveyance example, docks are multipurpose, used for both shipping and receiving. Conveyors into and out of the stockroom support the dual function docks and conveyors connecting all docks, thereby supporting cross-dock transfer of receipts to outbound trucks. In the third example, trailers designed to transport automobiles from factory to customer would best be intermodal -- suitable for piggyback railroad transport. And, by virtue of a hydraulic lift upper deck that can be lowered, they can accept new standard "land containers" for the backhaul. Although such a design may be less efficient for outbound loads than existing rigs, its overall utilization will be much higher. Existing trailers are a special-purpose design that makes it impractical to use them for backhaul. (New-age "land containers," trailers, trucks, and dock facilities that will help better balance inbound and outbound traffic and slash the tim

Edition details

• Publisher: Free Press
• Publication date: 1993
• Language: English
• ISBN 10: 0029138639
• ISBN 13: 9780029138632
• Binding: Hardcover
• Edition number: 1
• Number of pages: 384