Special report on “Back to the Basics” from the University of Tennessee


February 11, 2011 - SCMR Editorial

Once the product or commodity is purchased, it must be moved to the next point of use—be it an intermediary production facility, a distribution center, retailer, or end-consumer. As with sourcing and purchasing, however, the strategic importance of transportation is often overlooked. The reality is that the expected benefit of world-class operations at the point of supply, production, or customer locations will never be fully realized without excellent transportation planning and execution.

For transportation to make that needed impact in an integrated supply chain, managers need to become proficient at making smart decisions on four different levels—long-term strategies, lane operations, mode and carrier selection, and dock operations.

At the highest strategic decision level, managers must fully understand total supply chain freight flows and have input into network design. At this level, long-term decisions are made about the appropriateness and availability of transportation modes for freight movement. Managers need to decide which primary mode of transportation is right for each general flow (i.e., inbound, interfacility, outbound) by product and/or location, paying careful attention to any consolidation opportunities. Factors such as volume, frequency, seasonality, physical characteristics, and special handling requirements are part of the analysis.  Strategic mode and carrier-sourcing decisions should be considered part of a long-term network design, identifying core carriers in each mode to enhance service quality and increase bargaining power.  Also, managers need to make decisions regarding the level of outsourcing (if any) desired for each major product flow.

The second level of decision-making regards lane operation decisions.  Whereas network design decisions focus on long-term planning, these decisions deal with daily operational freight transactions.  At this level, transportation managers armed with real-time information on product needs at nodes in the system must coordinate product movements along inbound, interfacility, and outbound shipping lanes to meet service requirements at lowest total costs. Decision-makers adept at managing information can take advantage of consolidation opportunities, while ensuring that products arrive where they are needed, in the quantities they are needed, and when they are needed to facilitate other value-added activities. Importantly, they need to do all of this while realizing transportation cost savings. 

The primary opportunities associated with lane operation decisions include inbound/outbound consolidation, temporal consolidation, vehicle consolidation, and carrier consolidation. If managers have access to inbound and outbound freight movement plans, they can identify opportunities to combine freight to build volume shipments. An inbound shipment may arrive from a supplier located in Philadelphia, for example, on the same day that a production order destined for a customer in Wilmington, Del., is ready to move. If transportation planners know this information far enough in advance, they can arrange for the inbound carrier to haul the outbound load back to Wilmington—often at a lower negotiated rate.

Similarly, less-than-volume-load (LVL) shipments moving to the same geographic region on consecutive days may be detained until sufficient volume exists to justify a full load on one carrier with multiple stops (temporal consolidation). Multiple, small shipments inbound from suppliers or outbound to customers in the same geographic region scheduled for delivery on the same day may also be combined on one vehicle at full-volume rates, paying stop-off charges but saving on multiple LVL rates. Also, giving more shipping volume to fewer carriers—the core carrier concept—should result in lower per-unit transportation costs and higher priority assigned to your freight.

A third level of transportation decision-making involves the choice of mode and carrier for a particular freight transaction. Due to the blurring of service capabilities among traditional transportation modes, options that in the past would not be considered feasible may now emerge as the preferred choice. For example, rail container service may offer a cost-effective alternative to longhaul motor transport while yielding equivalent service.  Similarly, package delivery carriers are competing with traditional LTL operators. Truckload carriers, for their part, are increasingly bidding for low-volume shipments as well as for overnight freight movements. 

The final set of transportation decisions involves dock level operations, such as load planning, routing, and scheduling. These activities encompass the operational execution of the higher-level planning decisions.  While the fundamental purpose of shipping docks may not have changed much over the years, the manner in which work is done certainly has. One obvious change relates to advances in IT and decision-support systems.  These tools help dock personnel make better use of the transportation vehicle space; to identify the most efficient routes; and to better schedule equipment, facilities, and drivers. 

Environmental conditions like fluctuating fuel costs and carrier capacity constraints may tempt managers to depart from the discipline of the decision-making process at the different levels. Regardless of external pressures, though,  managers must encourage their organizations to avoid the temptation of making decisions based mainly on short-term gains. Rather, they need to view the total cost and total value provided by the transportation function—not only in terms of operating expenses, but with respect to customer service and inventory reduction.

Warehousing/DC Operations
From transportation, we move the focus to warehousing, a functional area that has been greatly affected by changing market expectations, technology advancements, and heightened demands for “greener” operations.These factors are converging to evolve the strategy, roles, and responsibilities of warehousing. In fact, “distribution center” (DC) is a more appropriate term for the scope of activities now taking place in these facilities.

For most products (raw materials and manufactured items bought in bulk being exceptions), DCs play a dual value-added role by making supply chains more efficient and more effective. They add efficiency by consolidating products for shipment to customers, reducing transportation costs, and performing a broad range of value-added services—for example, labeling, assembly, packaging, kitting, and reverse logistics. DCs also make the supply chain more effective. The strategic placement of these facilities allows products and services to be positioned close to major markets and customers.

Product type often determines the need for and specific role of DCs in the supply chain. Product types can be identified along the following characteristics:

• seasonality (in either production or consumption)
• demand variability
• manufacturing economics
• marketing and promotional initiatives
• service requirements; and
• customization and product variations.

For products with seasonality variances, for example, DC resources must be able to ramp up and draw down quickly in given geographical areas. Products that have extremely high time-sensitive service requirements (for example, emergency repair parts for aircraft or equipment for hospital emergency rooms) need fast-response facilities with ready access to expedited transportation modes. Similarly, many automotive manufacturers have “inbound” DCs located close to manufacturing plants so that subassemblies and other components can be assembled and placed into the production lines.

In addition to product type, certain other elements need to be carefully addressed to ensure a successful DC operation. These include:

Location. DC location is determined based on the location of major markets and customers, the location of supply points, the volume of product moving to or from supply points and customers, transportation rates, service levels required, and product characteristics. Local conditions—including access to and cost of labor, land and buildings, IT/communications infrastructure, transportation infrastructure, and tax incentives—also play a significant role in determining location.

Design and Operations. The product, how it is received, the nature of customer orders, service levels, and transportation mode are the primary determinants of distribution center design and operations. Product characteristics include weight and dimensions, packaging, shelf life, temperature and lot control requirements, and hazardous material requirements. How the product is received is key to both inbound operations efficiency (dock-to-stock cycle time) and space utilization/storage efficiency.

Information and Technology Requirements. Information is the critical driver for successful DC operations. Short-term forecasts provide information to determine labor and space requirements over a short term planning horizon. Longer term forecasts are used for capacity planning—for example, DC size, workforce, and equipment requirements. Information technology is critical in achieving DC performance. Warehouse Management Systems (WMS) direct where products should be stored and provide the necessary functionality for optimizing receiving, storing, and shipping operations. Most WMS systems also provide real-time information on the inventory status of all items in the DC.

Performance measures. The primary objectives of DCs are to provide the right product, at the right place, right time, and damage free—at a competitive cost. Fundamental to achieving and sustaining these objectives is performance measurement. A January 2010 study conducted by Georgia Southern University and consultancy Supply Chain Visions among readers of DC Velocity and members of the Warehousing Education and Research Council (WERC) found that the top three metrics used by respondents are on-time shipment, order filling accuracy, and warehouse capacity utilization. (Exhibit 2 lists the top 10 metrics reported.)

Identifying and analyzing those elements that will help determine how your DC network is structured and executed is a necessary building block of supply chain success—but the effort doesn’t stop there. The other essential ingredient is to effectively integrate the DC operations with the other core supply chain functions.

Returns Management
The warehousing and transporting of goods to the end customer does not necessarily mark the end of the supply chain process.  In fact, a growing percentage of these products today are reentering the supply chain and must be managed as aggressively as the products moving through the forward supply chain.  (There’s an after-sales service component to supply chain excellence, too, as described in the accompanying sidebar.)

The first step in effective returns management—often referred to as reverse logistics—is to understand the source and reasons for the returns. Basically, there are two categories of returns: defective returns and no fault found returns.

At the consumer or end-customer level, defective product comes back after purchase and some level of use.  Such returns could indicate quality problems that need to be resolved in manufacturing or distribution.  It is important to get a handle on these returns as quickly as possible. But many times firms find no defects upon inspection of returned products. These no fault found returns may be indicative of customers not understanding how to use the product appropriately, not being able to properly install the product, or simply finding that the product was not what they were expecting. These returns signal the need to re-engineer the product or communicate more effectively to customers about what to expect and how to use/install the product.

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