Why Warehouses Must Give Way To Integrated Distribution Centers
By Jeffrey B. Cashman and Bruce S. Richmond -- Supply Chain Management Review, 6/1/1997
Predictions of its demise notwithstanding, the warehouse is alive and well. But it's no longer simply a facility for storing product—at least not among organizations known for supply chain leadership. Now it's a flow-through, value-adding distribution center.
More important, today's distribution center is the key to a seamless supply chain. It provides the critical link between the chain's supply and demand sides. From the supply perspective, it focuses on efficient handling, inventory management, product flow, transportation, and delivery. From the demand side, it meets all customer-specific requirements—with maximum flexibility and responsiveness. (See Exhibit 1.)
Today's world-class distribution center is integral to the flow of products from supplier to manufacturer to the store—a key to getting the right products to the right place at the right time for the right cost. In addition, it can bring about significant improvements in order-cycle time, customer-service leadtime, shipment accuracy, inventory-record accuracy, and the cost of moving product.
In sum, while the traditional warehouse stores product, the integrated distribution center moves it. And does so in hours versus days or weeks.
Customers Have Great ExpectationsWhat's driving the evolution from warehouse to distribution center? Customers. They demand sharply higher performance, insisting that suppliers, vendors, producers, and distributors partner with them in streamlining the chain.
Specifically, customers want drastic cuts in cycle time, more frequent shipments, an end to stock outs, direct store deliveries—when and where specified. They also want more value-added services, such as customization to make products floor-ready and bar coding of containers and drop shipments. They want all these services at the lowest possible cost.
In short, customers are "raising the bar," demanding more for less. Fortunately, these higher customer demands are not impossible to meet if companies are willing to undertake changes. New business processes enabled by technology when performed by reskilled, reoriented workers make the transformation possible.
What do the heightened customer demands mean for the distribution center itself? Today's facility must reposition its operations to fill a variety of roles. First, an effective distribution center must serve as an extension of the manufacturing process as it prepares products so retailers can cross-dock and send them directly to selling floors. In fact, as it relates to these value-added services, the demarcation separating manufacturing from distribution continues to blur.
Second, the distribution center must help slash inventory across the network as the hand-offs get tighter and faster among sourcing, manufacturing, distribution, and the customer.
Third, it must be highly flexible in responding to a continually evolving environment. Traditional warehouses, for example, are inherently inflexible because they are oriented to mechanisms rather than systems. That's why they are giving way to well-designed, not overly complex, functional and flexible materials-handling solutions supported by good systems.
Fourth, today's distribution center manages inventory, product movement, and transportation across corporate boundaries with all chain members linked electronically to share information.
Fifth, its information systems should provide instant (and "rolling") feedback—the kind that offers real-time readouts of business pulse points, such as order, inventory, and production status.
Sixth and last, a world-class distribution center must move product faster with greatly improved accuracy.
Needed: A New Breed of Manager and MindsetThe transition from the traditional storage depot to a flow-through distribution center requires a totally new mindset. Gone is the traditional concept of the isolated, cost-driven warehouse. Now the distribution center must be seen as a cross-enterprise cog, customer-driven and agile. More important, it has to be run by a new breed of manager—someone who is comfortable operating a continuous "machine," not a storehouse. This new supply chain professional must be capable of dealing with tight deadlines and quick shifts in direction.
Too often, even this new breed of manager tends to rely too heavily on technology. Many executives don't understand that technology, no matter how advanced, is still a tool. It's not magic. People have to be oriented and trained to "pull the right levers," understand the exceptions, and keep their eyes on the ultimate business driver—how best to exceed customer demands.
That's why information systems or information technology should not drive the evolution to a distribution center. Don't waste time and money, for example, automating an antiquated system. It doesn't make any sense, especially when your business imperatives call for significant reengineering geared totally to delivering customer value.
Seven Steps to Successful ImplementationNot only does creation of an integrated distribution center demand new thinking and management commitment, it also requires a process of implementation that guarantees expected results. In short, the resulting changes must stick with the organization.
What are the critical success factors for implementing this transformation? Some of them are:
- Developing a strategic and guiding vision.
- Designing materials-handling solutions and operation processes that support the vision.
- Recognizing that people will ultimately make it work.
All of these success factors are embedded in the seven implementation steps detailed below. But before examining those principles, let's zero in on the warehouse-management system (WMS), a piece of software that's crucial to creating an integrated distribution center. The scope of WMS is broad. To optimize the flow of information and products within the four walls of a distribution center, a WMS incorporates functionality for stock locating, bar coding, inventory control, materials handling, and productivity measurement. Its applications comprise receiving, putaway, wave management, order allocation, replenishment, picking, shipment scheduling, shipping, inventory control, and cycle counting.
Implementation of a WMS becomes the focal point of integration. It's where everything comes together: process reengineering, software solutions, and materials-handling solutions. The warehouse-management system also is integrated with other software systems, such as order management, transportation planning, and labor management. A WMS is not off-the-shelf software that is simply put into place. It acts as the gatekeeper, the axis of the new distribution operation.
Vendor integration becomes a major objective of WMS implementation for several reasons. Most software vendors, for example, have migrated to packaged solutions and away from custom software. This is a positive trend because vendors are creating common interfaces to smooth the integration. But that's still no guarantee everything will work as it's supposed to. To ensure that the components fit and come together, someone must be made clearly responsible for managing the task.
Without question, there's a compelling case for reconfiguring the warehouse as a key link in a chain. Yet many organizations continue to ignore these positive arguments. Others make half-hearted attempts that founder or even fail.
Why are success rates low for warehouse evolution? There are no simple answers. Many companies procrastinate because they mistakenly feel that the revamping process will be too disruptive. Others take incremental rather than bold steps. Still others see the solution narrowly in terms of technology—a guaranteed blueprint for failure.
In our experience as consultants, we have identified at least seven key implementation principles—all of which must come into play to transform the warehouse and its organization. Companies that follow these imperatives can establish an integrated distribution center as part of their supply chain. They include the following:
1. Adopt a Fully Integrated Approach.
Throughout warehouse transformation, nothing is more important—from Day One—than an integrated approach. As Exhibit 2 illustrates, there must be a continuing balance among strategy, people, business processes, and technology. These interdependent competencies must be linked and coordinated throughout the transformation of the distribution center. What affects one affects all.
But who in the organization should play the integrating role of project manager? The answer depends on the situation. In some cases, someone from within the organization itself may have the required skills. In other situations, a specialized consultant or the WMS vendor should oversee the project.
In sum, the project manager ensures that all solutions (1) reflect a good understanding of where the business and its industry are going, (2) are coordinated with technology-enabled core processes, (3) are embraced by reskilled workers at all levels, and (4) are linked with all supply chain systems.
Let's look at each of these in more detail:
A good understanding of where the business is going. This starts with an understanding of specific customer demands—and how those demands can be fulfilled. Once the new distribution strategy is determined, then several key questions must be addressed. What is the facility going to look like? What are the new processes going to look like? What is the new materials-handling solution going to look like? Then how do we pull it all together to meet those customer demands?
Coordination with technology-enabled core processes. A good example is balancing the design of materials-handling solutions, which is process, with the way people work and, at the same time, with supporting technology. In short, the new strategy must coordinate with core processes enabled by technology.
Acceptance by reskilled workers. A distribution center must have the right people, with the right skills, dedicated to doing the right things—all fully aligned with strategic goals. Furthermore, the workers must not feel like brokers who simply buy packaged solutions. They have to be committed to own the strategy, own the process, own the changing environment, and own the enabling technology.
Links with the supply chain systems. Information must flow for this strategy to work. It should encompass the strategy of operating the new supply chain all the way through to how the product goes out the door to the customer. Interfaces with other business systems in the company pose a challenge. Enterprise-level systems—for example, order management, inventory management, transportation management and forecasting management—must be linked to the WMS; the WMS, in turn, must be linked to the materials-handling solution.
Take this case in point: A large apparel manufacturer in the South installed a new warehouse system based on complex technology. But the work was done without the guidance of a clear business strategy. It was no surprise that the end result was a total failure of the system and a serious financial setback for the company.
2. Take a Partnership Approach With Vendors.
Creation of an integrated team of diverse players will provide the skill set to handle dozens and dozens of major-level tasks to perform when implementing the distribution solution. The team lineup should include the organization's managers, the project manager, a host of vendors, consultants, and perhaps even architects and contractors. With such breadth on the team, a number of questions arise. Who does what? What role does each play? How do you get everyone to buy into the idea of working as a partnership? How do you make judgments about whether specific vendors have the depth and breadth to fulfill their assignments?
A lot of grief can be avoided if, early in the project, strict criteria are followed in narrowing the field of viable WMS vendors. Specifically, an acceptable vendor should have all of the following: a) a packaged solution proven in the marketplace, b) an excellent industry reputation, c) a predisposition to teaming, d) solid financials, e) limited or no litigation, f) sound product and technology vision, and g) structured training programs for customers.
Why doesn't the team integrate naturally? Because each player often has his own agenda. Software vendors, for example, offer packaged solutions in warehouse management, order entry, time and attendance, routing, manifesting, etc. Their core competency is building and installing such software. As such, they may not be adept at interfacing with host systems, as well as hardware vendors, human resource managers, architects, contractors, and, most importantly, people.
Furthermore, terminology is often a confusing issue. Not all vendors speak the same language. So, again, there's no substitute for a program manager who can make a team partnership work. Someone must "get their arms around" the project, from strategy, design, and planning through testing and conversion. Otherwise the project can easily go off track.
3. Adopt a Proven Methodology as a Road Map for Executing the Project.
Because most companies demand that the new distribution center be up and running in a matter of months, not years, a proven, well-defined and carefully documented methodology is crucial. It minimizes risk and assures on-time completion by clearly delineating roles and responsibilities and maximizing the core competencies of all players. Most important, the methodology lays out a fail-safe road map for successfully executing the project.
Central to the methodology is an implementation approach involving three distinct phases: conceptual design, detailed design, and implementation. All are essential. None can be short-changed or bypassed:
Phase One—the conceptual design stage (see Exhibit 3)—consists largely of operations strategy and software selection. This is the point in the process to confirm the business strategy, develop logistics reengineering concepts, establish fundamental business requirements for materials handling, and select a WMS vendor. It concludes with an investment analysis that summarizes all these steps, confirming an understanding of rules and responsibilities going forward, the budget, and time frame.
Phase Two (see Exhibit 4) is concerned more with detailed design and "conference room" pilot. It involves the modeling of WMS software against the reengineered processes and the detailed design/specifications for the materials-handling solution. WMS modeling is essential because it exposes any gaps between what the software can provide and what the business case requires. In this way, the company can determine the costs of bridging the gaps—and whether the business benefits justify those costs.
Phase Three (see Exhibit 5) focuses on implementation and start-up. It addresses construction of the materials-handling solution, organization structure, training, unit testing, system testing, production simulation, conversion, ramp-up, and support.
Technology involvement is especially deep in final stages to (1) review/verify vendor-provided hardware, (2) do network and database sizing, (3) develop or review interface architecture, (4) analyze system performance capabilities and (5) execute a complete integration and customer acceptance test.
For logistics/distribution management, the methodology proves invaluable as a knowledge-transfer mechanism during the entire span of the project. In effect, by shadowing the project manager, the company is better equipped to operate the new distribution center and continue improving its performance.
4. Reskill, Reorient, Remotivate, Retrain.
Consider a hypothetical project where our first three success factors—integrated approach, partnering, and methodology—have been achieved. Would that guarantee delivery of an effective, productive distribution center? Unfortunately, it would not. The chances of success are slim unless there's strong executive sponsorship, clear and continuing communications, and well-focused training.
That's why today's world-class distribution center demands a totally new mission statement. People now have to relate differently to the business as well as to their own jobs. After all, an integrated distribution center—being customer-driven—is no longer focused entirely on cost and efficiency. Now it's geared toward meeting marketplace demands—faster shipments, on-time deliveries, automatic replenishment, and value-added services. Achieving that mission takes a major shift in thinking and orientation.
Unfortunately, it's easier said than done. People don't like their comfort zones to be disturbed. That's true especially when chains of command that once identified position and prestige now must be dismantled.
Our experience shows that the people equation is the toughest to solve. It requires a strong, continuing effort to (1) secure the organization's buy-in and commitment to change, (2) empower employees to handle more responsibility, and (3) do what it takes to make them sense they have ownership of the new processes.
Workers need to acquire new skills, gain a thorough understanding of how their jobs will be different, and appreciate why higher levels of discipline are required. Specialists who have prided themselves on doing one set of tasks for 20 years now must become multifunctional. Their performance is evaluated differently according to new rules, priorities, exceptions, standards, and procedures. They also have to learn and accept a sense of urgency, responsibility, and decision-making powers.
Few executives, however, understand what it takes to reorient such a work force. They don't fully appreciate the need to change mindsets, alter attitudes, demystify the changes, and adapt to new tools. That's why executive communication is critical, in concert with focused training. This does not mean classroom instruction. Rather, it calls for performing hands-on, on-the-floor tasks side-by-side with the trainers.
Managers often underestimate how long it takes people to change long-standing work patterns. At one company, the old warehouse had a vertical file where people hit a button and picked out product. When the operation was streamlined, however, those vertical files were taken out and replaced with a flow rack. The project team put out a memo announcing the change. But on the day the change occurred, some 50 people ended up standing around because they didn't know where to get the product from. They wanted the vertical files.
Yes, people challenges are daunting. But unless they are addressed, the organization winds up with a functional system that delivers little or no business value.
5. Test and Convert Thoroughly—Don't Cut Corners.
A common misconception is that once all the components are built, the rest is easy—just hook them together and crank up the solution. This mistaken belief probably accounts for more delays and failures than anything.
Consider the case of FoxMeyer Health Corporation. A recent article in The Wall Street Journal detailed the company's disastrous experience converting to a new distribution software system while at the same time opening a new facility, closing older ones, and attempting to service new clients. One industry analyst quoted in the story attributed the problems—which included millions of dollars' worth of lost, misdirected, and unbilled drug shipments—to the company's decision to proceed with the software launch without adequate testing.
The urge to skip testing and methodical conversion is understandable. Vendors, for example, have worked for months building their pieces of the solution, and they are anxious to plug them in and get on to something else. But nothing could be more damaging.
Most players with a new solution grossly underestimate how difficult it is to (1) get all the components to work together and (2) make an orderly conversion with minimal disruption of the ongoing business. Too few ask: "How am I going to turn this thing on so that the workforce, the volume, the building, and the equipment all work together?"
Three levels of testing are critical: unit testing, system testing, and stress testing. Unit testing is conducted to ensure all stand-alone components function satisfactorily by themselves. This includes materials-handling equipment, software packages, and interfaces. Often a "firewall" approach is the best answer. In effect, the project manager must draw a firewall to prevent any component from being system-tested until all the "bugs" have been cleaned up.
Likewise, system testing becomes vital to determine whether the integration of all the components is working. This is where a lot of connectivity issues emerge—plus a few surprises.
Stress testing makes sure the new solution can handle the expected volume. It may also test the performance of the interface between a conveyor system and a WMS. This may sound too simple to warrant much attention, but we have seen major glitches show up here that no one anticipated. These can not only result in poor response times but total shut-down because the system became too "bogged down."
Finally, there's the issue of conversion. It starts with key questions: "How do we ramp up volume? How do we ramp up the workforce? Have we done enough training? Do we want to do everything at once, or by function, or by best customers, or smallest customers?" In other words, what's the methodical way to turn on the new solution?
As the system ramps up, it starts to hit various thresholds—computer problems, materials-handling problems, people issues, and so forth. In each case, if a project manager is guided by a good plan, he or she can back away from it down to the previous level. There the manager can fix the problem and bring it back up with minimal or no impact. That's the beauty of the methodology. It guides the conversion process.
It is crucial, throughout this process, for the project manager to resist pressure to move faster and be less methodical as there's no substitute for careful, fail-safe conversion. Otherwise the project will surely founder, costs will increase—and the whole solution could fail.
6. Manage the Project Aggressively.
While the project manager must be thorough in terms of testing and methodology, it is equally important to be aggressive in managing the overall program. That includes integrating participants, partnering with vendors, monitoring and tracking progress, and managing the executives' expectations.
Most important, the project manager must keep an eye on the "big picture." That's because distribution-center management may become so focused on its own issues that it loses perspective on what's happening at the overall enterprise. And this can be disastrous.
A major retail pharmacy chain, for example, went through a significant transformation of its logistics and distribution systems. Then three weeks before it converted to the new system, the company acquired another retail chain. The acquisition changed their product mix and delivery schedules. As a result, the company had to change to a new system overnight at a huge cost.
The moral of the story is that major transformation projects cannot be done in a vacuum. They must fit into the company's overall strategic plan even as that plan continues to evolve. It's imperative to name a project manager who not only understands the corporate context but also makes sure the project is always in sync with other company initiatives.
7. Make Technology the Enabler—Not the Driver.
The evolution of a distribution center as the supply chain's focal point constitutes a business issue. It is driven by strategic imperatives, not the selection of a database or hardware platform.
In its enabler role, technology is evolving from a centralized to a more distributed architecture. A few years ago, this trend troubled many because the technologies often were unproven. But today, as vendors leverage these technology trends, they can be counted on to support a new decentralized environment. Don't hesitate, therefore, to move away from the mainframe, especially as decentralized technologies continue to get better, faster, and cheaper.
Once the company's strategic direction is set, then a number of significant technology concerns need to be addressed. For example, because the typical information systems (IS) organization has old technology skills, it may be unable to partner effectively with—and leverage off—leading-edge vendors. A top priority, therefore, is to gain relevant skills and resources, via acquisition or training, to support the new technology infrastructure.
No Pain, No GainClearly, product-delivery systems of the 1980s are obsolete in the 1990s. As customers continue to demand that companies do more with less, the storage-oriented warehouse will give way to distribution centers that manage product flow across the supply chain. In fact, today's center offers distinct competitive advantages through premier customer service capabilities.
If the concept is so compelling, why aren't more organizations making smooth transitions to the new environment? Why are there so many shortfalls in achieving expected results?
For one thing, most companies underestimate what it takes to implement the transformation—from strategy and design through execution, testing, and conversion. Yet they want the work done "quicker, cheaper, faster, and better." The priority, then, is getting the right skills, the right partners, and 100-percent commitment from all participants.
Make no mistake, however. There is no substitute for a project manager who rides herd on all the players, integrating the many solutions and fostering a true partnership. But even a good project manager will be hobbled without a proven methodology that guides, paces, tests, and coordinates all the components. It is the key to ensuring quality, thoroughness, and success.
Finally, people issues are pervasive and paramount. They present the biggest challenge, the most significant success (or failure) factor. Both workers and managers need help in adjusting to a very different way of doing business. This is no place for pep rallies and tired slogans. The workforce must sense a strong management commitment to make change work. On top of that, the workers need to acquire the skills and training that build confidence and empower them to perform at higher levels.
Is it worth all the pain and expense? Absolutely. Look at the dramatic, measurable results illustrated in the sidebar titled "The Evolving Warehouse: Before vs. After." If the transformation is done right, the payback is quick and the return on investment impressive. Furthermore, the enterprise gains an enviable position as the premier supplier with its customers.
| Author Information |
| Jeffrey B. Cashman and Bruce S. Richmond are both partners in the Strategic Services Supply Chain Strategy Practice of Andersen Consulting. |
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