Cheaper leaner greener
The results of our 4th annual Warehouse/DC Operations Survey reveal that warehouse and distribution decision makers are shifting from an outward strategic focus to an internal tactical focus, adopting a lean, green culture while continuing to cut costs across the board.
By Maida Napolitano, Contributing Editor -- Logistics Management, 11/1/2009
Like most business sectors, warehousing and distribution operations have taken quite a hit in this economic downturn. In fact, Logistics Management’s 4th annual Warehouse/Distribution Center (DC) Operations Survey reveals that the industry continues to hunker down and look internally for ways to cut costs as businesses cope with low consumer demand and overcapacity.
A quick look at this year’s high-level findings paints a pretty complete picture of the current environment. For example, inventory turns decreased from a high of 9.86 in 2008 to 8.04 in 2009—an 18 percent drop. On top of this precipitous plunge, many warehouse and distribution managers told us that they’re deferring expansion plans, freezing incentive programs, and re-examining transportation strategies to stabilize their operation. On the brighter side, however, the “leaning and greening” of DCs continues to gain ground dramatically, as managers work on getting their operations in shape for when the economy does recover.
Despite the tough sledding, warehouse and distribution managers were eager to share the details behind their operations. In fact, this year our study received a record 887 responses—up 16 percent from 2008. Eighty-eight percent of respondents ranged from CEOs to upper-level managers who are all personally involved in decisions regarding their company’s warehouse and DC operations.
Most of the participating companies hail from manufacturing (41 percent), followed by distributors (28 percent), third party providers or 3PLs (14 percent) and retailers (11 percent). We also had another healthy mix of industries represented, with food and grocery (13 percent), general merchandise (9 percent), pharmaceutical and health care (8 percent), and electronics (8 percent) leading the types of products being handled in participating facilities.
Over the next few pages we’ll detail what the DC network of 2009 looks and acts like. We’ll then highlight significant operational changes, technological trends, and investigate the status of “green” initiatives and other supply chain improvement processes that today’s warehouse and DC mangers are taking to get their operations tuned up for the inevitable upturn.
High-level findings
Despite a few results that go against the grain, Scott Pribula, principal and market sector leader with TranSystems, a consulting firm specializing in transportation and supply chain services and Logistics Management’s partner in the survey, notes that the results reconfirm how companies have a number of good intentions, primarily to improve their supply chains, yet they don’t want to invest the capital needed to get there.
“The percentages of paper-based, manually driven, conventional operations remain basically unchanged from previous years, indicating that only a very few are investing in new technologies, automation, or new information systems upgrades,” says Pribula. And while interest in new systems may be high, Pribula concludes, “Everyone wants to get on the bandwagon, but nobody wants to pay to get on it.”
Don Derewecki, assistant vice president with TranSystems, agrees. He adds that the results show that there’s presently a pervasive atmosphere of cost-cutting where managers are watching every penny. “You have to have very solid justifications on anything that you’re spending in terms of getting a return on that investment. You can’t just say 'it improves customer service.’ That’s not cutting it anymore.”
Instead, the majority of managers are now more focused internally, searching for ways to make their operations less expensive to run. Most are obviously still feeling the sting of high fuel prices, because reducing transportation costs remains an action item for 80 percent of our survey participants (page 42). Most (32 percent) report shifting the mix of common or contract carriers to keep a lid on costs. Twenty-five percent are re-routing company-owned trucks to improve the efficiency of delivery routes using a transportation management system (TMS). Some (20 percent) are asking customers to order less frequently, but in larger quantities.
When it comes to supply chain improvement processes, the adoption of a “lean” culture continues to increase significantly—from 30 percent in 2008 to 39 percent in 2009. According to the findings, respondents are turning to lean programs to introduce opportunities to reduce or eliminate non-value added steps and waste in an operation.
Green initiatives are also on the up and up. Ninety percent of respondents say they are implementing at least one green initiative, up considerably from 75 percent in 2008. Pribula believes that the surge to be green is in part driven by companies recognizing that it’s a low-cost, easy-to-adapt program that will make it less expensive to run facilities in the network.
Topping the list of green initiatives is recycling, which experienced a 5 percent increase from 2008.
Profile of 2009 DC network
The physical profile of this year’s DC network is almost unchanged from last year. Most networks (66 percent) are still made up of three or less facilities with many (36 percent) still operating with just a single facility. Typical building size remains between 100,000 to 249,999 square feet with clear heights of 20 to 29 feet.
Pribula speculates that the high occurrence of networks with five or more buildings may very well be in direct response to businesses attempting to not only increase customer service but to control highly volatile transportation costs by locating more DCs closer to customers. “We’ve seen a continuing trend toward the addition of smaller facilities closer to the end-user to reduce transportation costs.”
About 57 percent of respondents say they handle less than 5,000 SKUs—virtually the same as 2008. At the other end of the spectrum, about 10 percent still handle well over 50,000 SKUs. Derewecki believes that one of the drivers of low inventory turns may be the excess in SKU assortment. “Everybody’s stuck with these slow-moving products that they haven’t gotten out of their system yet.”
The nature of operations
Most DCs (59 percent) remain a combination of full-pallet, full-case, and split-case inbound-to-outbound operation. According to Derewecki, this continued drive toward split-case distribution, with many customers ordering more frequently and in fewer quantities, has only made matters worse for some operations.
“Many don’t have the proper workstations and the proper information systems support, thus making the receipt of split-case quantities more difficult than it really needs to be,” says Derewecki, adding that although a highly sophisticated system is not a requirement, planning for split-case operations is essential.
This year’s survey also revealed a significant decrease in the percentage of product received in only “full-pallet” quantities, from 17 percent in 2008 to 13 percent in 2009. Pribula attributes this to shippers wanting to fully utilize the cube of a tractor trailer by filling any empty space with full or split cases. Some respondents reported a shift from loading only full pallets into trailers to floor-loading trailers with full cases.
Even more DCs are implementing some kind of value-added services (VAS). This has increased from 80 percent in 2008 to 84 percent in 2009. Most VAS operations continue to include some sort of special labeling (56 percent), followed by the assembly of promotional packs (35 percent).
On the labor management side, this year we found that incentive programs, for the most part, have been curtailed. Results show that 33 percent of respondents are no longer offering any incentives—that’s up from 27 percent in 2008. For those who are still giving incentives, additional pay or some kind of monetary bonus remains the most popular choice. “Be happy you have your job,” says Derewecki. “These days it seems like that’s the best incentive.”
Technology/WMS in a holding pattern
While the number of users of full-featured warehouse management systems (WMS) and basic WMS has been decreasing over the years—from 74 percent in 2008 to 58 percent in 2009—there is however a slight increase (1 percent) in the use of ERP as a WMS. “Although I don’t necessarily agree with it, companies will typically put the ERP system in first then adapt a WMS out of it,” says Pribula. “It doesn’t surprise me that we see that happening in this survey.”
Derewecki agrees. “When companies converted their entire business to SAP, for example, top management frequently pushed warehouse and DC managers to adopt SAP’s WMS functions and learn to love them.”
This year’s findings echo last year’s on the topic of technology employed in picking and overall materials handling systems. The key takeaway is pretty straightforward: If an operation was paper-based in 2008, it’s still paper-based in 2009. If they had foregone mechanization last year, it’s clear that there are very few plans for buying a single conveyor this year.
More than 70 percent of respondents still do conventional receiving, picking, and storage. Sixty percent still pick orders using paper pick tickets. And even though paperless technology has been commonly used for over 20 years now, it’s obvious that many still don’t want to take that leap. The capital expense of shifting to a paperless system remains a huge hurdle that management is not willing to take—especially in this economic climate. Derewecki adds, “When we talk to clients about implementing technology in this economy, many of them would say we want to do this, but there’s just no budget to do anything,” he says.
The very few who did go paperless opted for radio frequency (RF) with scan verification (43 percent, up from 41 percent in 2008) over light-assisted and voice-assisted picking technologies, which both took slight dips.
Looking ahead
In 2009, 67 percent of respondents said they were not planning on any expansion in the next 12 months—that’s 10 percent more than last year. On the flip side, there are those lucky 33 percent that are expanding by increasing square footage (54 percent) and/or increasing their SKU offerings (54 percent).
Still, it’s evident that much of the warehousing and distribution industry continues to be mired in today’s economic doldrums. Derewecki urges companies to be in a position to react quickly. He counsels managers: “Have your plans in place, so that when the economy does turn around your competitors don’t leave you behind, putting yourself at a competitive disadvantage.”
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