We received a number of good letters on our On-Target article on SKU and activity profiling in the DC. That includes our Feedback of the Week from David Armstrong of Inventory Curve, who offers some great real life examples to make his points.
We also received a few letters on the new concept of "Vested Outsourcing."
You will find Amstrong's letter and all the Feedback below..
Feedback of the Week: On SKU and Activity Profiling in the DC:
This is important information to capture and review.
Also important is to do a unit (packages/cases) per order distribution. I have found many companies that have never done this and it opens up a whole new level of insight in system design choices and costs.
Here are three real life examples:
A major CPG manufacturer designed its distribution systems and operations and made many product/order pricing, pricing decision based on an average order size of 26 units based on total units shipped divided by total orders. When a units per order size distribution was performed, it showed that order size of 1 unit was the mode (most frequent), the median size (50% break) was 3 units and the mean was 26 units.
The small orders had high fixed costs and low variable costs per order while very large orders (several hundred units or more accounted for few orders but were the bulk of the unit volume and low fixed order costs but accounted for high variable costs.
Warehouse and distribution operations were changed so that there were 2 separate and distinct processes, for for the small orders (the bulk of the orders) and on for large orders (the bulk of the volume). Warehouse throughput improved and costs were reduced. Changes were also made to order level product pricing strategies.
A major CPG product produces semi-custom make to order products. Due to low density and the need to have order ship complete to the ultimate consumer, as each unit was manufactured it was sent to a staging area to be held until each total order was complete and could be shipped. With over several hundred units being produced per day, this holding area was a major bottleneck in the process.
A unit per order distribution was performed and showed that almost 40% of the orders were for one unit. A simple change was made to the production work order for each unit that showed the total units on the order.
Product that had a unit count of "1" was sent directly to the packing area and shipped. This took one day out of the process.
In the staging areas, additional changes were made to accommodate and streamline orders of size "2" and "3".
By getting these orders out of the way, space, clutter and time was freed up to allow larger sized orders to be handled much more effectively, again taking time and space out of the process.
A wholesale/distributor made daily deliveries to customers on flexible routes. Planning and costing was based on average dollar order size.
When a distribution by order dollar size was done, it showed that large numbers of orders were for small revenue dollars. In this pricing and commission changes were implemented so that the true costs of handling small orders in the pricing strategy.
More On SKU and Activity Profiling in the DC:
There is no question that right now (or within a couple months) is a good time to consider SKU and Activity profiling.
Right now, there are macroeconomic effects on product demand and order patterns. These are the effects of a depressed economy that has changed buyer behavior in terms of increased or, most likely, reduced outbound demand. This behavioral change is perhaps significant enough that SKU and Activity profiling would provide a noticeable reduction in cost of product selection at the warehouse.
Microeconomic factors are also influencing outbound demand right now. These involve product movement fluctuations due to holiday periods and change of seasons, and they affect different operations in various ways. For example, demand for certain grocery items like pumpkin pie mix and cranberry sauce will spike during the Thanksgiving/Christmas holiday season and then tumble as we leave that season/holiday period.
There is great value in making sure seasonal items like these are SKU Profiled correctly during the holiday season (to avoid stockouts) and then re-SKU Profiled after the holiday season (to not use up valuable high velocity pick slots).
Similarly, regarding Activity Profiling, these two grocery items might be ordered together quite often (order commonality) during the holidays and then not ordered very often together during the rest of the year, suggesting that the items might need to be slotted near each other (and in larger slots) for a short period of time during the holidays and then moved after the holidays.
We normally recommend three to four annual SKU Profiling reviews (with minor slot assignment changes happening on a regular basis). This activity is especially important in the midst of this economy, as the macroeconomic influence on warehouse productivity will magnify the benefits of the normal SKU Profiling exercise.
Thanks for a good summary article. Another key facet is the replenishment methodology. Slot size and easy of replenishment comes into play a great deal at my sight. We are experimenting with mixed lot number IT solutions and multiple prime locations for the same product so that pickers face fewer exceptions and disruptions.
Director of Operations
LYNDEN INTERNATIONAL LOGISTICS CO.
On "Vested Outsourcing":
I think the article is spot on. The relationship if managed well allows you to avoid having the arrangements fail because the “contract” did not cover the particular problem that has come up. Of course if relationships are important then we should measure them … how many Supply Chain leaders actually do this?
Interesting that the DoD funded this because the research mirrors that done in the UK several years ago in Defense Procurement, see www.sccindex.com . It seems all governments have problems with making outsourcing work!
AD Supply Chain Group Pty Ltd
I really like this article. It seems to me that a relationship based on trust is fundamental to achieving vested outsourcing. When I worked at Helene Curtis in the 90's, we built trust with the suppliers who were part of our outsourcing strategy. And since almost 30% of our unit volume was outsourced, we did not want win-lose relationships.
Herb Shields, CMC