Monday, April 21, 2008

Understanding Cross-docking

Supply chain management is all about flows. Material flowing through warehouses is no exception. Conventionally the warehouses were set up as inventory buffer points along the supply paths so that demand fluctuations across the network could be smoothed. That provided stability to the planning and operations of the supply chain.

But better technology, integrated systems and near real-time information exchange have all made it possible now to operate the warehouses more efficiently. Where the product and demand attributes allow, it is possible to leverage cross-docking opportunities and reduce the inventory buffers at the warehouses.

Cross-docking basically involves receiving the merchandise at the inbound docks and then shipping it out shortly after without the need to stock it at the warehouse. If planned and executed properly it saves the intermediate disposition, storage and order fulfillment tasks in the warehouse. Well planned cross-docking operations save resources across the board, at the warehouse like labor, space, and equipment; and also technology resources by simplifying the process.

As cross-docking does not require the inventory to be stored at the warehouse, it provides dual advantages of:

  • Operational Efficiency: As the material does not have to be stored at the warehouse, and directly moves from the receiving docks to the shipping docks or staging areas, the warehouse operations are more efficient.

  • Inventory Efficiency: As the inventory moves directly from the receiving to shipping docks, there is no storage at the warehouses for the cross-docked items and that reduces the total system inventory in the supply chain.

There are two variants of cross-docking that can be leveraged. Both of these address different situations and need specific process/system capabilities but both are founded in the cross-docking concept and provide the same advantages.

Planned cross-docking or flow-through

Planned cross-docking is a deliberate strategy for the supply chain. It consists of determining the products that will be the best candidates for cross-docking/flow-through operations, and then deploying a complete demand and supply management process that leverages the flow-through strategy at the warehouse. These products will typically show the following characteristics.

  • Such products will normally have consistent demand that is not too high or too low. They can be seasonal as long as the seasonal demand has the same stable characteristics, and the processes can handle data specific procedures. The values of these attributes need to be established based on the sales history data, averages, and the speed of movement of specific merchandise. If the demand is too high then the items may be best served with a direct-to-store distribution model, and if the demand is too low/intermittent, then stocking at DCs may be required to consistently meet service levels.

  • They have good handling characteristics, through they can be conveyable or not. Flow through operations may require staging, pallet-breaking, and re-packing; and some product may just not have the physical characteristics conducive to that.
    Once the target products have been determined, the implementation of the strategy requires that the supporting business processes are adjusted for making the shift. Some of these are discussed below in the section on pre-requisites.

Opportunistic cross-docking

This is an ad-hoc cross-docking process that takes advantage of real-time information exchanges among various distribution and fulfillment systems. Opportunistic cross-docking identifies when an inbound shipment or part of shipment (LPN/pallet) can be used to fulfill an outstanding order by directly routing the inbound merchandise to the staging or shipping docks for an outbound order. Opportunistic cross-docking is typically a pure cross-docking exercise and does not require any break-pallet or other similar intermediate tasks.

This type of cross-docking is not as process intrusive as the above. It is simpler to implement, and only requires that the warehouse systems have real-time visibility into all requirements, on-going shipping and receiving activities, and yard inventory; and that they can react to such information dynamically. This means that the warehouses are using the RF based devices and processes, rather than paper based processes.

Technically, most of the current systems are deployed in an integrated fashion, networked with other enterprise applications through messaging, and can exchange information in real-time; thus making this a reality. Therefore this largely becomes a business decision.

This type of cross-docking may also not provide any significant inventory reduction benefits but this is broadly applicable across most products, and provides the warehouse operation efficiencies without large changes in the business planning and execution processes.

Are you ready?

If you are ready to implement a flow-through strategy at the warehouses, make sure to review and plan through some of the following areas.

  • Warehouse Readiness: The physical assets in the warehouse, warehouse design, and layout affect the ability to implement a successful flow-through strategy.

    • Warehouses for cross-docking typically need large number of dock doors, and large areas devoted to staging. These warehouses can be seen to have two categories of products, “flow-through” and “stock-and-distribute”. Depending on the proportion of the flow-through assortment compared to the total warehouse assortment, the areas required for staging, and the number of dock doors will vary.

    • Flexible yard management processes are another requirement before successfully deploying the flow-through strategy. The warehouse system should have visibility into the inventory in the yard, as well as enough yard jockeys to manage the trailers between the docks and the yard.

    • Mechanization can help. When large assortments at the warehouse are conveyable, mechanization helps simplify the flow of merchandise through the warehouse from the receiving docks to the staging areas, or shipping docks. This is not a pre-requisite but can have huge cost impacts if planned properly.

  • Business Readiness: Flow-through processes require changes in existing business processes and expectations.

    • You will need to establish business processes and organization to identify and maintain the best candidates for flow-through. As described above, there are certain product, and demand characteristics that define such products. These characteristics can change over time (such as demand), and will require a review of the target assortment. You will need to establish the criteria, frequency, and ownership for these processes. The inventory profiles of these products will vary as they move to the flow-through strategy. It is important to understand how such changes will affect the current inventory metrics, and team’s perception of success.

    • Replenishment planning is the other business process that impacts the flow-through strategy. The process must consider that there is no warehouse storage of these products any more. This may mean adjusting safety stocks at the stores, service level expectations, and potentially adjusting the frequency and size of orders. Some of these changes may need re-negotiating with the suppliers and may have their own lead-time.

    • Fulfillment network must be reviewed to make sure that all stores are within an acceptable distance from their primary distribution center. Flow-through strategy may result in smaller but more frequent shipments to stores. Make sure that your distribution network is capable of handling such changes without adverse effect on the service levels.

    • Distribution processes get affected when the warehouse task planning reacts to real-time changes in receiving and shipment requests. Make sure that the people in the distribution center and the stores are aware and have bought into the strategy. Consider things like fixed schedules and frequency of receiving in the stores, relative priority of shipments received from the DC over shipments from suppliers, store labor planning and scheduling models. All these processes may need to be reviewed and validated for their alignment with the new strategy.

  • System Readiness: Finally, your enterprise systems must be ready to support the changes in the business processes, and operations.

    • Analytics: Make sure that you have enough historical sales data and analytics capability to define the best targets for the flow-through strategy.

    • Warehouse Management: Warehouse management systems will typically need to be integrated with the enterprise systems to receive real-time updates on shipments, material requests, and distribution orders. They should be able to react to these changes and re-plan if required. A paper based process in the warehouse cannot be used for changes in plans dynamically, make sure that the system supports the wireless handheld terminals in the warehouses. A warehousing system that is integrated with the automation/mechanization increases efficiencies, and reduces errors.

    • Forecasting and Replenishment: Review your forecasting replenishment processes to establish the level at which the forecasts and purchase orders are generated. Inventory planning systems that can dynamically compute the optimal inventory levels and guarantee service levels ensure a successful transition to the flow-through strategy. Collaborative orders and fulfillment environment with your suppliers can help. Inventory visibility across the enterprise across all inventory carrying locations is another useful tool to have. All these capabilities enhance the efficiency of the flow-through process, however only some of them are required and will hinder the implementation.

    • Allocation: A flow-through environment makes it possible to review the original allocations again at the time of receiving the merchandise. Though it is not required, it allows the retailers to react to any demand changes in the time between when the order was placed and when the merchandise is received. The concept is very similar to manufacturing industries holding off the final assembly to the last possible minute. If you decide to re-allocate at receiving, make sure that the allocation systems are capable of reviewing and re-allocating merchandise on-demand. The alternative strategy also requires a review of the system to make sure that the order pegging is maintained between the DC and store orders.

    • Logistics: Flow-through implementation may affect the characteristics of the shipments from DC to stores. You may have more number of shipments, more multi-stop shipments, and more frequent shipments. Make sure the transportation systems can optimize such shipments, track them as they move, and allow changes by the users if required.

    Cross-docking or flow-through is definitely a strategy worth a serious review. However a successful implementation requires that the people fully grasp the concept, and plan vigorously for success. In a future article, we will discuss what factors should you consider to decide if a flow-through strategy makes sense for your company or not.

Saturday, April 5, 2008

Are your suppliers helping you, or hurting you? (Part 2)

In Part 1 of this article, we discussed the Fulfillment Execution Metrics for measuring supplier performance. The second part of effectively managing supplier relationships is process compliance. In this part, we cover the Process Compliance Metrics for the supplier performance management.

Well established processes normally provide a repeatable performance that is efficient, normally highly automated, and does not depend on individual level of skills to achieve a dependable result. Purchasing processes cross the organizational boundaries and their total efficacy depends on how well the suppliers comply with the Retailer’s processes. Measuring process compliance helps Retailers identify the suppliers with issues, and address these issues before they start affecting the supply chain efficiency.

The key to a successful process compliance program is to identify which transactions are core to the smooth functioning of the purchasing and delivery processes. Within these transactions, it requires that the key data elements are identified clearly. And finally it requires that these expectations are plainly defined and become part of partner contracts. These transactions cover the merchandise suppliers, as well as carriers, and can consist of all the following.
  • Vendor facing: Purchase Order Acknowledgement, Request for Routing Instructions, ASN (advanced shipping notice), and Merchandise Invoices
  • Carrier facing: Load Tender Response, SSM (shipment status message), and Freight Invoices

Having these transactions automated (for example through EDI messages) helps in capturing when the process breaks as well as managing the resolution quickly.

Process compliance metrics normally measure the following three aspects of any transaction:

  • SLA (Service Level Agreement) Compliance: It measures whether a required transaction response was sent within the agreed time. For example, if PO Acknowledgements are expected for every PO within 24 hours of transmission, then this metric will track how many POs did not get any acknowledgements, and how many acknowledgements were received after the required 24 hours SLA. It applies to all the transactions mentioned above, but is required to be measured only if it brings specific value to the Retailer. For example, if PO Acknowledgements are used to project on-order quantities and enable order promising, it will be a good transaction to track. However if no other functionality depends on this transaction, there is no need to require or track this SLA.
  • Format Compliance: This measures if the required transaction any format issues that may have caused the transaction to fail. Most relevant for electronic transaction exchange (EDI/XML/pre-formatted files), it ensures that the automation does not fail and transactions are not dropped unexpectedly through the process due to formatting errors. For example, if dates are required to be transmitted in mmddyyyy format, was it done? For EDI formats, did it have all the required segments, and was the format of each data element as expected?
  • Content Quality Compliance: It measures the data quality of the transactions exchanged. For example, if the ASN must reference the PO number then this metric will measure how many ASNs did not have the PO number (this filed was left blank), and how many had an invalid PO reference. Of course this requires that such fields are clearly identified and communicated to the partners in advance.

Just like Fulfillment Execution Metrics, these metrics can also be shared with the suppliers as a score-card. These can also be used to identify the top and bottom complying partners to prioritize the efforts of the compliance teams. And finally, Retailers can charge-back when suppliers fail to live up to contracted process compliance agreements.

Are your suppliers helping you, or hurting you? (Part 1)

It is a clich√© but it is still true. You don’t know what you don’t measure, and you can’t improve it either. Retailers need to maintain their service levels, they need to make sure that the shelves are adequately stocked with the right merchandise when customers come looking for it. This is no small job, given the large assortments, complex replenishment processes, and a large number of suppliers.

Suppliers (used in a generic sense including merchandise suppliers and carriers, alike) play a huge role in smooth operations of a Retailer especially in the execution phase. They affect what gets shipped, where, how much, when and in some cases, how. While there is a mutual expectation for compliance to Retailer’s requirements, it may not always happen. Unless of course, Retailers measure their suppliers for good execution performance and process compliance.

Here is a quick primer on what to measure for effective supplier relationship that compliments your business goals rather than hurting you. In Part 1, we will discuss what I call Fulfillment Execution Metrics, and in Part 2, we will cover the Process Compliance Metrics. Together these metrics provide a comprehensive view of the working relationship with the suppliers, and can help point to areas of opportunities for mutual benefits.

Fulfillment Execution Metrics:

Fulfillment execution measures how effectively the suppliers fulfill the merchandise orders. The process efficiency revolves around the three main factors, Quantity, Quality, and Time.

  • Quantity: This metric primarily provides the fulfillment rates. There are various quantities that could be measured for effectively measuring the order fulfillment process. These are Ordered v. Confirmed; Confirmed v. Shipped; Shipped v. Received; Shipped v. Invoiced; and finally a Fill Rate calculation that makes sense for a Retailer. Most relevant definition will be to compare the Ordered Quantity to Received Quantity. Other quantity comparisons mentioned above (if routinely short of expectation) simply point to the sub-process that may be under optimized and needs attention. A Perfect Order metric is usually a composite metric generated from the above as orders that were fulfilled on-time, complete, damage-free, and accurately invoiced. However there is no single definition of perfect order and this metric can be computed based on what makes the most sense for a retailer.
  • Quality: Most Retailers do not require inspection on inbound merchandise. However the quality matters. It affects Retailers’ operations through increased consumer returns, unsatisfied customers, and additional labor to process returns. Retailers can get a good grasp on quality by measuring Damaged Packages, Damaged Goods, and Customer Returns. The first two can be made part of the warehouse SOP. Visually check damaged packaging at receiving, and flag the transaction. Check for damaged goods when pallets are broken into case/boxes/eaches. Customer returns are captured through the store returns process or RMA generated/received for the other channels.
  • Time: This is third metric for measuring the effectiveness of the fulfillment process. There are two types of metrics for time that should be tracked.
    • First one of them is the lead-time. There are various types of lead-times that are important. The total fulfillment lead-time consists of lead-time components that are controlled together by the supplier, and the carrier. Some of these components are the Order Acknowledgment Lead Time (time between the order (850) transmission date, and order acknowledge (855) receipt; Order Processing Lead Time (time between order (850) transmission date and RTS (ready-to-ship, typically EDI document 753, request for routing); Ready to Ship Confirmation Lead Time (time between receiving a 753 request, and sending back a 754, routing instructions document); and finally the Transportation Transit Time (time between pick-up shipment status message, 214; and yard-check-in at the destination facility). Keeping tabs at the lead-time provides realistic data for replenishment systems that helps create correct demand forecasts. Trends in lead-time usually point to a broken sub-process.
    • The second one relates to the activity level SLA (service level agreements). Examples in this category are violations of pick-up and delivery-time windows by the carriers.

      Once these metrics are measured, they can also be shared with the suppliers as a score-card. Retailers can use them to identify the top and bottom suppliers to prioritize their relationships. And finally, Retailers can charge-back when suppliers fail to live up to contracted service levels.