Warehouse and Distribution Center Management: Sitting Tight
The results of our 3rd Annual Warehouse/DC Operations Survey reveal that the struggling economy and reduced consumer demand have forced warehouse and distribution decision makers to become much more cautious.
By Maida Napolitano, Contributing Editor -- Logistics Management, 11/1/2008
Our 3rd Annual Warehouse/DC Operations survey revealed that today’s DC managers are “battening down” their operations as they ride out 2008’s economic storm of rising fuel costs and reduced consumer demand in a weakened economy. Although some managers have tried keeping warehouses and DCs “leaner and greener,” most are proceeding with caution, sticking with the equipment and plans they already have in place, and making very few plans for expansion. In short, managers are sitting tight.
Conducted in early September, our annual survey—which gleaned 762 responses from Logistics Management readers—is designed to gauge trends in distribution operations and examine the evolution of warehousing and distribution facilities over the past year. Eighty-four percent of the responses came from upper-level managers ranging from directors to CEOs who are personally involved in decisions regarding their company’s warehouse and distribution center (DC) operations. And in light of the current economic downturn, we also added a few questions this year to determine how the leadership in this segment is responding.
So, what did we find? In the next few pages we offer a detailed snapshot of what the DC of 2008 looks like and acts like. We then focus on operational changes, check out the latest in productivity measurements and incentive programs, report technological trends, investigate “green” initiatives, and discuss the high-level initiatives that these top warehouse and distribution managers are planning to implement once the current economic picture brightens.
High level findings
The first finding slapped us across the face: It’s simply impossible to begin any discussion about the current state of anything logistics related without first mentioning the effect of rising fuel costs.
“High fuel costs are forcing people to think of each and every mile’s delivery costs, especially for LTL shipments,” says Geoff Sisko, assistant vice president for Transystems|Gross & Associates, a logistics consulting firm based in Woodbridge, N.J., and Logistics Management’s partner for this annual survey. When asked specifically how they addressed this year’s rising transportation costs, 32 percent of respondents told us they were re-routing company-owned trucks and improving the efficiency of delivery routes using transportation management systems (TMS).
Twenty-four percent are asking their customers to order less frequently but in larger quantities; and 15 percent are using third-party logistics (3PL) providers to get closer to customers. On the flip side, 26 percent told us that they’ve done nothing in response to high fuel costs.
“What’s surprising is not that 26 percent are taking no action to volatile fuel costs,” notes Don Derewecki, vice-president at Transystems|Gross & Associates and the principal author of the survey, “but that a whopping 74 percent are now actually doing something to address this energy debacle.” Five years ago—even a year and a half ago—DC managers didn’t worry about it so much. Today, transportation costs have clearly become a major issue in DC network planning, pushing more decision makers to the white board to hash out cost-cutting strategies.
What’s another harbinger of cautionary times? Inventory turns (the number of times in a year inventory is “turned over,” or converted to goods sold) have decreased across the board compared to last year. Last year’s survey showed the mean to be 9.8 turns per year. This year, turns are averaging only 8.7 per year.
“That’s a significant 11 percent decline in turns,” notes Derewecki. Our survey team speculates that lower than expected consumer demand has resulted in DCs holding more inventory. Sisko explains: “You may have a three-month lead time for bringing merchandise from overseas. Unfortunately, sales start dropping off in July, but you’re still receiving based on old forecasts until September or October. You haven’t sold as much as you expected, so your inventory increases and your turns decrease.”
However, we’re happy to report that the findings aren’t all doom and gloom. When compared to 2007 results, this year’s survey shows a little bit of growth in technology adoption. Despite the tough economy, there’s an increase in DCs with mechanized receiving (up to 14 percent from 10 percent last year) and there are a reduced number of DCs that report sticking with conventional/manual picking (from 80 percent to 75 percent). Conveyor-based and fully automated picking systems have each increased slightly as well, according to our results.
All in all, however, there appears to be a general attitude to maintain the status quo among many managers—at least for now. When asked whether they plan to expand the size and scope of their DC operations over the next 12 months, 57 percent say they aren’t planning any expansion—that’s up from 54 percent from last year. “When times get tight,” says Derewecki, “people typically turn away from costly improvements and concentrate on the basics of doing their jobs.” Sisko concurs. “Managers are saying we’re not going to make a move now because of everything that’s going on.”
Today’s DC
Physically, the 2008 DC has few changes from the one we built last year. The typical distribution network is still made up of only one building, totaling about 100,000 to 249,999 square feet; although this year we saw slightly more respondents with larger network square footage. The most common clear height ranges from 20 to 29 feet, but Sisko predicts that in the next few years the trend will shift towards higher facilities.
Most are still privately owned, with 37 percent servicing a manufacturer, 28 percent servicing a distributor, followed by 10 percent servicing a retailer. There’s a slight increase—from 13 percent in 2007 to 16 percent in 2008—of warehouses being run by a 3PL provider. Most (34 percent) still define their area of service as “global.”
However, there is a slight increase in respondents servicing the entire U.S. (up from 23 percent in 2007 to 27 percent in 2008) with decreases in companies servicing regional and single metropolitan areas. According to Sisko, this trend towards a nationwide area of coverage can be tied to a marketplace where previously regional companies are reaching out to more customers via the Internet and e-commerce.
The number of SKUs being handled in a DC is still growing, going from a mean of 12,500 SKUs in 2007 to 14,800 SKUs in 2008. A closer examination shows the industry with the most SKUs is “apparel, shoes, and accessories,” followed by “general merchandise.” Could this proliferation of SKUs be a trend? Derewecki says that it does, in fact, appear to be a trend, but one that may not last too much longer. “In a bad economy one of the first things to get cut is the variety because holding a variety is expensive—especially when you’re not making a profit on it,” he says.
Operational changes
Most DCs (57 percent) still remain a full-pallet, full-case, and split-case inbound-to-outbound operation. For operations with full pallets inbound, there has been a significant increase in full-pallet, full-case, and split-case outbound—from 27 percent in 2007 to 40 percent in 2008.
This finding shows that more managers in this category are shipping in smaller, split-case quantities. From what he’s seen in the field, Derewecki says he absolutely agrees with this trend. “It’s a direct result of customer directives that come from the very top to minimize investment in inventory.” The downside: With piece-picking, the operation gets more complex, requiring more resources to fill orders.
Over 70 percent of respondents still do conventional receiving, picking, storage, and replenishment, with 62 percent still picking orders using paper pick tickets, followed by 41 percent that use Radio Frequency (RF) with scan verification. Despite the popularity of RF, paper-based systems still dominate. Why? Our survey team believes that the capital expense of shifting to a paperless system is still a huge hurdle that management is not willing to take—especially in this economic climate.
This year’s findings, like last year’s, once again validate that value-added services (VAS) have become a part of every DC landscape. Most VAS operations still involve some sort of special labeling (55 percent), followed by the assembly of promotional packs (34 percent).
Labor measurement and incentive updates
In terms of labor measurement, 44 percent of respondents track “unit/pieces per hour” to measure productivity. Using engineered labor standards, however, has decreased from 25 percent in 2007 to 17 percent in 2008.
Sisko believes that the days of doing stopwatch timing and elemental time analysis is probably close to over. “A lot of people are now using data that they’re gathering from their WMS,” he explains. “It can track the time elapsed with every scan and with every transaction.”
Last year, 47 percent of respondents said they offered no incentives to their employees. Managers must have realized the effectiveness behind incentives, because this year that number has gone down to 34 percent. Many managers (38 percent) still offer incentives to an entire staff or team of people. “It’s just easier to manage,” says Sisko. “There’s also a certain amount of self-regulation among the team that occurs. Anyone not performing well receives immediate pressure from the rest of the team members.”
What’s the most popular incentive? The majority of respondents still prefer additional pay or monetary bonus (56 percent), followed by gifts or gift certificates (28 percent).
Tech trends/process improvements
Fewer respondents (from 20 percent in 2007 to 18 percent in 2008) are getting by with little or no WMS. Derewecki believes that managers have found increased confidence in information systems that are becoming available at more reasonable costs.
The alternative? Eleven percent of respondents are using SaaS, which stands for software as a service, where an application is hosted as a service provided to customers over the Internet. Sisko describes it as leasing the WMS versus purchasing it. “There are fewer upfront costs because you are not paying for licensing fees and need less hardware.”
The most popular supply chain improvement process is still lean warehousing—a program where one continuously tries to figure out opportunities to reduce or eliminate non-value added steps and waste in an operation. According to this year’s results, 34 percent are currently using supply chain visibility solutions that facilitate the sharing of data with suppliers and customers.
Someone say green?
In addition to getting lean, more companies are also going green—a fact the survey team clearly expected. Last year, 25 percent said they had not implemented any green initiatives; this year that number is down to 11 percent.
Why the big change? Derewecki believes it’s because of continued pressure from government and consumer groups. Sisko adds that companies are saving money by installing equipment and systems that reduce the consumption of a DC’s energy and resources, such as fans that promote cooling and the re-use of shipping containers. On top of this, we found that 70 percent indicated that they recycle in their effort to go green—some actually earn thousands of dollars a year just by recycling their corrugated.
Parting advice
In these uncertain times, there may be a temptation to “wait until the dust settles.” However, this is a move that the research team does not endorse.
“Waiting may put you well behind the curve,” notes Sisko. “The innovative, decisive management teams will be looking at options and preparing long term contingency plans as well as implementing some changes in the short term.”
Derewecki agrees. “It’s best to be proactive. Managers and management teams that are doing nothing won’t be with us very long.”
Both strongly believe this economic slowdown should be seized as an opportunity. “When the going gets slow,” Sisko explains, “that’s the best time to re-warehouse, re-slot, and re-examine how you can improve your operation.”
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