Virtual Taskmaster

Software packages that incorporate industry best practices right into their rules are whipping laggard shipping operations into shape.

By James A. Cooke -- Logistics Management, 5/1/1999

MOVE OVER, SIMON LEGREE. Today's taskmaster may be your own computer's disk drive. More and more companies are turning to software applications to impose the operational discipline required to achieve state-of-the-art results in warehousing and transportation.

But software can do more than just crack the whip. Software tools also enable shippers to examine their operations and change the way they perform logistics activities. "The technology forces them to look at the organization and the restraints on process changes," says Richard Thompson, partner in Ernst & Young's supply chain management consulting practice. "It involves looking at the people and how they do their jobs."

Ideally, software can help companies transform their operations, and in the most successful cases, it can lead companies to adopt best practices in logistics. "Technology enables process change and ... the benefits come from process changes," notes Thompson.

Positive Discipline

At the start of this decade, a number of business management consultants began promoting the notion of best practices. The idea was simple: Highly profitable companies tend to excel at such basic business activities as order fulfillment, on-time shipment and delivery, picking, and inventory tracking. Ultimately, businesses that are the best at these types of practices gain a competitive edge in the marketplace. By defining these best practices, the thinking went, other companies could adopt these standards for their own operations and realize an almost immediate improvement.

Although highly paid consultants preached the gospel of best practices, companies often found that they had a hard time changing their corporate culture to achieve them. It was one thing for consultants to define a standard for best practices in a warehouse: for example, shipping orders within 24 hours of receipt. But it was another matter to get warehouse workers and management to meet that standard.

Software applications, however, impose an operational discipline that can't be ignored. A warehouse management system (WMS) might be programmed with a standard shipping time of, say, 24 hours and then measure the warehouse on whether it adheres to that practice. "[The software] creates a baseline [against which] to measure yourself," says Thompson. "You can sustain the benefits because you can measure them."

Given these benefits, many companies are beginning to peg their re-engineering efforts to software installation. "Companies have found that they do a better job when they re-engineer using software," says John Bermudez, group vice president of enterprise strategies at AMR Research Inc. in Boston. "If you spend a million dollars on a consultant to re-engineer, the company can revert back [to its old way of doing things]. But software brings about a discipline that's positive."

Software as Taskmaster

By their very nature, software programs are built on a set of rules. And those rules define the practices a company should follow in its operations--for example, picking product and shipping to a customer within 24 hours of order receipt. "Software asks you to define the business process where it might not have been defined before," says consultant David Durtsche of CSC Consulting in Cleveland.

Inherent in rules construction for many programs is the assumption that the procedures will constitute best practices. "By and large, a lot of software has best-practice standards embedded in the programming," says David Frentzel, partner in the consulting firm Northeast Logistics of Sherborn, Mass. "The software houses have taken existing best practices ... and encoded that into their software."

To accomplish this, software vendors often form their own user groups to determine best practices for a particular industry segment. They then develop so-called "industry templates," a set of exemplary practices for a given industry, says Steve Banker, senior supply chain analyst with Automation Research Corp. in Dedham, Mass. "Industry verticals will have different issues," he explains. "For the food and beverage industry, [there's] an issue with retail compliance, while the electronics industry wants traceability of electronic parts to ensure best practice."

In fact, the most commonly used type of business software--the enterprise resource planning (ERP) package--was built on a series of best practices, reports consultant Joe Martha, who works in Mercer Management's Cleveland office. Unfortunately, ERP packages were designed originally for manufacturing and finance, not distribution. "ERP [systems] have their strengths in the financials and order processing," notes Martha. "But you're not going to differentiate yourself from your competitors on how well you do your general ledger--rather, it's on the services you provide. So you need some of the other packages that are available."

Those other packages often are referred to as best-of-breed, single-point software solutions. They belong to a broad category of software called "supply chain execution and planning systems"--and represent a market with a bright future. AMR Research Inc. of Boston estimates that companies worldwide purchased some $2.8 billion worth of this type of software in 1998.

One popular type of supply chain software is the warehouse management system (WMS), which oversees labor and equipment in a warehouse. This type of rules-based application promotes efficiency in receiving, storage, and shipping and hence best practices in a distribution center. "Using a real-time inventory-control stock locator and rules-based putaway logic and rules-based picking logic allows people to optimize labor and minimize costs," says Ron Swanson, a director in the Weston, Mass., office of the consulting firm Pittiglio Rabin Todd & McGrath (PRTM).

Another common type of supply chain application, the transportation management system (TMS), plans shipments and selects carriers. Such software packages usually are rules-based and drive best practices by promoting compliance with customer expectations for delivery. For example, Banker says, a retailer might require a company to ship 100 percent of its shipments weighing under 100 pounds by a certain carrier. "If you don't send things their way," he says, "you get hit with a chargeback or penalty." Software can help track compliance with requirements like these.

The third most common type of supply chain software package is the advance planning and scheduling (APS) program, which forecasts future production and inventory needs. Although these programs can be rules-based, Banker says, they tend to use a special architecture. "What is unique about APS is that it's based on advanced mathematics and is capable of much faster planning," he explains.

Because of their inherent software design, APS applications can solve more complex distribution problems and analyze tradeoffs between inventory and production across the entire supply chain. Companies can use the software to implement best practices throughout the entire company, not just the distribution department. "APS allows you to solve complex problems in a manner no human mind could duplicate," Banker says.

Computer-Imposed Discipline

Installation of packages like these forces companies to define distribution activities and collect data on those activities. "Technology defines the process of collecting the data and how things move," explains CSC's Durtsche. "If I ship out cases from a warehouse, I have to scan the pieces. It puts a process in place as opposed to an ad hoc process on the receiving or shipping side. Similarly, if you're doing transportation routing, you need all the data on destinations so you can do adequate routing. You also need to know all the weights and cubes of your products to allow the systems to do what they're designed to do."

Data gathering and definition enable companies to begin measuring distribution activities, such as cases picked per hour or orders shipped on time from a warehouse. Many software packages maintain logs or records that management then can use to measure performance. Once companies have internal data on their own activities, they can compare themselves with others or set clearly defined service targets to achieve best practices in shipping, picking, or order fulfillment.

By using software to define and measure their logistics activities, shippers begin to identify bottlenecks and hurdles in their work processes. Thompson reports that a Fortune 500 client of his that installed a TMS package realized nearly half of its benefits by eliminating internal constraints on delivery windows and the timing of batch orders. "They discovered that if they eliminated these restraints, they would be able to make more truckload shipments rather than LTL and reduce their expenditures," he recalls. "These optimizations provided a whole new look at their organization. There were considerable changes [they could make] that would put them in a leading-practice environment."

One recent innovation in software packages even fosters best practices through notification mechanisms that alert managers to dropoffs in performance, reports Banker. The use of key performance indicators with "alert" mechanisms began with APS packages and has begun spreading to WMS programs. "A company can have a whole bunch of key performance indicators with a whole lot of data associated with it," Banker says. "Let's say we're going for 99-percent accuracy on on-time delivery. If I fall to 90-percent on-time delivery to a retailer, I'm notified."

Although software can enable change, one consultant adds a word of caution: Companies should not count on the software to transform them into industry leaders. "If [companies view] the tool as the solution and make changes that are not driven by business needs, typically benefits don't result," says Swanson of PRTM.

A Requirement for Success

Although software should not be viewed as a substitute for a corporate strategy, future applications will do even more than current programs to promote best practices in logistics. "We'll [soon] have a whole new stream of software to manage human resources as well as product," predicts John Champion, a consultant with Kurt Salmon Associates in Atlanta.

One obstacle has been the cost of software licenses and implementation. Many small companies haven't been able to afford such systems. However, Champion and others believe that prices will come down, leading smaller companies to embrace these software tools. Indeed, small companies may have little choice but to invest in technology if they want to institute the same best practices their larger counterparts follow.

"We're in an era where you continually have to improve at managing your own supply chain, and technology is a prerequisite for that," he says. "It's less of an option now. It's almost a requirement to succeed in business today."