Value Added Services (VAS), which is loosely defined as a collection of specific requirements mandated by customers involving additional processing of a product or an order beyond the simple picking of the product for an order, is an especially common practice in the retail supply chain and is estimated to consume +10% (and growing) of total labor hours.

According to Logistics Management’s 2nd Annual Warehouse Operations Survey, 80% of respondents are dealing with some form of VAS in their DCs. This was confirmed during in-depth interviews conducted by Distribution Digest for our report on Automated Case Picking (ACP). To download the report, go to (Automated Case Picking 2009: The Next Frontier In Distribution Center Management).

VAS are typically highly manual operations, mostly impossible to automate, and include everything from custom packaging and labeling, to facilitating crossdocking at a retailer’s DC, to creating a special assortment for an in-store promotion. The most common types of VAS include, but are not limited to, the following operations:

• Ticketing and price labeling
• Kitting
• Customer specific repackaging including promo, special value packs, and store-ready displays
• Product assembly including folding, hanging and bagging
• Building customer specific and rainbow pallets – assembling an assortment of product rather than just one SKU – there has been some success at automating this through the deployment of articulating arm robotic and gantry type palletizers (see report referenced above)
• Special labeling of pallet loads and/or individual cases/items

The last VAS listed above is of particular concern to the logistics executives we interviewed because these requirements could, in their view, make it less attractive to deploy ACP technologies. One logistics VP said that the compliance labeling changes they have already seen were causing them to leave as much as 30% of their case pick volume outside of an automated system they have implemented. To read more about this see the SCDigest article (Worrisome Trends in Retail Compliance Labeling Requirements) and video (Supply Chain Video: New Retail Label Compliance Requirements Worrisome?)

What’s A DC Manager to Do?

As listed above, DC executives throughout the supply chain are being called upon to perform an ever increasing myriad of VAS, many of which take hours of manual labor to complete even including personalization operations such as monogramming and gift wrapping.

One thing for sure is that the ostrich approach of hiding your head until the problem goes away is not the answer. We’re definitely seeing a trend toward more VAS occurring in the DC. This is being driven by retailers who just don’t have sufficient backroom staging space, so as items come off the truck they are flowed onto the sales floor as quickly as possible.

For retailers then, it’s a resource issue as well as a space issue. They don’t want store personal stuck in a constricted backroom doing operations that can be done more efficiently up stream in the supply chain.

So, for better or for worse, VAS has become part of day-to-day pick/pack operations, and many DCs have had to create extra steps to accommodate that, like adding VAS functions to their WMS. Still, when you measure it on a productivity basis for units per hour, VAS will most likely be the least productive operation in the DC – it’s customized, manual, and it changes with each pick and each order.

If you consider the automated sorter as the heart of the typical batch-order picking system (because it’s doing the final distribution and order consolidation), then you will need efficient and easily customizable picking methods to handle VAS feeding into that sorter. Which, when you think about it is all the more reason for deploying ACP solutions that can lower labor cost by automatically picking and delivering cases to VAS workstations then, when work is completed, transport them back to active pick locations within the ACP system.

Working Together To Improve Supply Chain Performance

The simple truth is that when you are processing thousands of cases an hour and shipping dozens of trailers per day, there just isn’t a lot of time for VAS, especially that which doesn’t provide real benefit.

In any event, the DC should have a process to approve a customer for VAS, because in the end it’s a business decision. You can tell a customer that the DC can do just about anything they want but it’s not free. The customer needs to gauge how important it is to its business. Sometimes retailers are surprised that their requests don’t add any value.

As an example, one VP of Operations, described a situation where an existing customer ordered standard 12 packs last year, however this year all their orders were in 6 packs. The Ops VP went back to the customer explaining that when you’re handling 80,000 cases verses 40,000 there is a big difference in handling and processing cost. That particular customer understood the logistics cost impact for the DC, as well as for them, and immediately changed their PO back to 12 packs.

Still, for some DCs the consequences of VAS have been more frequent shipments and in smaller quantities, forcing many of them into piece-pick operations where they had previously been a full case-based pick. Or, at the very least, having to open full cases to apply tickets and other paperwork and then manually applying a special shipping label.

If it is determined that the cost absorption for a specified VAS is too great, the DC can try to work with the customer to obtain waivers, or in some extreme situations refuse to comply.

On the other hand, a major component of an efficient supply chain is getting everything done on the first touch. Therefore, it can be logically argued that in many cases moving VAS upstream to the manufacturing level is moving it in the right direction. That’s crucial, for example, in a DC where 60% or more of products purchased are in less-than-case quantities, meaning those SKUs must be picked and packed manually before they leave the DC.

Basically, there are two types of internet orders:

(1) The company-owned site where the customer comes to the site to purchase items directly from the company’s DC and the company dictates all the rules for picking, packing, shipping, and invoicing of the order. This approach includes minimal VAS.

(2) A service vendor’s site where selected company products are on the vendor’s site and the company becomes like a 3rd party shipper for that vendor. In this case the service vendor dictates all the rules and the shipment looks like it came from the service vendors DC. The order is typically shipped in a generic box, and all labeling and paper work carries the service vendors ID not the company’s. Adds some VAS but within controllable standards.

A variation of the above would be the Amazon window approach which is more like a general store front for products where the customer can see who the actual provider and shipper is.

Final Thoughts

If the trend away from industry standardization continues, the next generation of automated systems must take into account far greater variables than SKU velocity/proliferation, and customer order profiles/volatility. Continued escalation of VAS demand puts a higher level of risk in investing in automation, because you don’t know what tomorrow could bring to unravel it.

Therefore some considerable thought should be given to alternative approaches - like applying emerging ACP solutions to the discrete order picking model, which would then offer the highest level of operational flexibility and productivity. With ACP the picking labor component is no longer a factor in order picking productivity making it more cost effective and easier to integrate the more labor intensive VAS operations. While the modularity and scalability of ACP solutions lowers risk enhancing their appeal.

Agree or disagree with Holste's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the website. Upon request, comments will be posted with the respondent's name or company withheld.

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