Wisdom for Warehousing | The Optimal Role of Warehousing in Supply Chains and Business

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Wisdom for Warehousing Edward H. Frazelle, Ph.D. RightChain™ Institute “Develop your business first, before building your house. The building of a house is by wisdom, and by reason it is made strong.” - Solomon

RightChain™ Warehousing Warehouse Optimization as a Service RightChain™ Warehousing Warehouse Optimization as a Service

First Things First! King Solomon was the wisest man of all time, the greatest of all the kings of the earth; and in real, time-normalized dollars, he was the wealthiest man who ever lived. He was also a great builder, famous for the construction of Solomon’s temple, one of the world’s iconic structures. In reading some of Solomon’s books, I came across a key principle for building that is profound wisdom for warehousing. “Develop your business first before building your house.” - Solomon Applied to building warehouses, the principle is to first determine the business and supply chain requirements for the warehouse, then build it. Many enterprises have it backwards, so focused on the physical structure, their businesses wind up being constrained by their infrastructure instead of being bolstered by it. Our RightChain™ Methodology and optimization systems are designed to help our client customers identify the business and supply chain requirements their warehouses are meant to serve.

Coca-Cola Logistics Campus Raleigh, North Carolina

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RightChain™ Incorporated

Built with Wisdom! “The building of a house is by wisdom, and by reason it is made strong.” – Solomon There are many warehouses that are foolish in their design and operation, and weak in their ability to support the business and supply chain missions they are meant to serve. In contrast, what Solomon is saying in modern day terms, is that logical design, flow, investment, and staffing are the elements of a reliable warehouse operation and building; one that reliably and effectively serves the mission it was designed for. Our World Class Warehousing course, book, and methodology coupled with our RightChain™ Warehousing optimization system, are our attempt to support our client customers with the best possible wisdom and reasoning for building and operating strong warehouses.

HP Hood Plant Warehouse Winchester, Virginia

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RightChain™ Incorporated

Section 1 PriceSmart vs Domestic Warehouse Club Supply Chain Configurations RightChain™ Warehousing We literally wrote the book on warehousing.

Authored by Dr. Ed Frazelle, RightChain’s founder, and published by McGraw-Hill, World Class Warehousing is the world’s authoritative resource and guide on warehouse optimization, best practices, metrics, analytics, and systems.

Company

Sector(s)

Countries Taiwan, USA

Facilities

Footprint

Applied Materials

High Tech, PARTS Health & Beauty

3 5 1 7 7 2 2 2 3 5 3 2 3 3

415,000 sf 947,000 sf 120,000 sf 2,380,000 sf 1,717,000 sf 2,145,000 sf 1,314,000 sf 3,208,000 sf 617,000 sf 404,000 sf 712,000 sf 1,484,000 sf 1,112,000 sf 654,000 sf 535,000 sf 780,000 sf 5,670,000 sf 24,214,000 sf

Avon

Colombia, Mexico, USA

Caterpillar Coca Cola

Heavy Industry, PARTS

USA

Food & Beverage

Argentina, Brazil, Mexico, USA

Disney

Merchandise, MRO, PARTS

France, Japan, USA

General Mills

Food & Beverage Consumer Products Automotive, PARTS Food & Beverage High Tech, PARTS Health & Beauty

USA USA

Hallmark

Honda

Japan, USA

HP Hood

USA

LAM Research

Japan, USA

NuSkin

Japan, Korea, USA

Nutrisystem

E-commerce

USA

Pratt & Whitney

Aerospace, PARTS Aerospace, PARTS Maintenance, PARTS Valves & Fittings, PARTS Maintenance, PARTS

Canada, USA

Raytheon Rio Tinto Swagelok

USA

Australia, Singapore, USA Switzerland, Japan, USA

US Dept of Defense Sample of RightChain™ Warehousing Engagements

USA

121

RightChain™ Incorporated

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The Many Faces of Warehousing

Manufacturing Line Support Finished Goods Storages

Global and Local Receiving Case Pick Local Retail Distribution

National Rail Receiving Piece Pick E-Commerce Distribution

Global & National Container Receiving Auto Dealership Daily Truck Delivery

Finished Goods Receipt from Production Seasonal Finished Pallet Frozen Storage

Global & National Container Receiving Omni-Channel Distribution & Returns

RightChain™ | Supply Chains. Solved.

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The Many Faces of Warehousing

Off Site Production Receiving Piece & Carton Pick

Global & National Container Receiving Piece Pick, Carton Ship

Global & National Container Receiving Aerospace Assembly Pick and Kit

Global Container Receiving Piece Pick, Carton Ship

National Truckload Receiving Aerospace Assembly Pick and Kit

Global and National Stuffed Container In Piece Pick Parcels Out

The Many Faces of Warehousing

Plant Warehousing Customer Pickup

Asia Receipt Processing & West Coast Store Fulfillment

Seasonal Finished Goods Storage

East Coast Trans-loading 40’ Stuffed Ocean Containers In 53’ Palletized OTR Containers Out

Production Lot Size Economies & Store Replenishment Full Truckload Single SKU Pallets In Stop Sequence Mixed Pallet Route Trucks Out

RightChain™ | Supply Chains. Solved.

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Section 1 PriceSmart vs Domestic Warehouse Club Supply Chain Configurations RightChain™ Warehousing Methodology

RightChain™ Staffing Workforce Optimization

RightChain™ Moves Material Moves Optimization

RightChain™ Eaches Each Picking Optimization

Storage Density and Accuracy

RightChain™ Cases Case Picking Optimization

RightChain™ Pallets Pallet Storage and Picking Optimization

Resource Productivity & Utilization

Section 1 PriceSmart vs Domestic Warehouse Club Supply Chain Configurations RightChain™ Warehousing Warehouse Optimization as a Service

Optimization and analytics for warehouse storage, picking, slotting, material flow, and staffing.

Productivity increases 14% to 32%.

Section 1 PriceSmart vs Domestic Warehouse Club Supply Chain Configurations RightChain™ Warehousing Benefits

Storage density increases 12% to 29%.

Storage Density and Accuracy

Warehousing cost decreases 14% to 31%.

Error rate decreases 4 to 11 points. Resource Productivity & Utilization

RightChain™ Warehousing | RightChain.ai/warehousing

Warehouse Control Tower

RightChain™ Warehouse Insights

WAREHOUSE OPTIMIZATION DESIGN

RightChain™ Staffing

Metrics Patterns Predictions Insights Practices

WAREHOUSE ACTIVITY & RESOURCE DATABASE

WAREHOUSE INTELLIGENCE SYSTEM

WAREHOUSE OPTIMIZATION SYSTEM

Optimizations Algorithms Methodologies

Staffing Optimization

RightChain™ Warehousing Metrics

RightChain™ Flows

WAREHOUSE MANAGEMENT SYSTEM

RightChain™ Slotting

RightChain™ Storage

RightChain™ Warehousing Practices

RightChain™ Picking

Warehouse Layout Optimization

Pallet, Case, & Each Storage Optimization

Pallet, Case, & Each Slotting Optimization

Pallet, Case, & Each Picking Optimization

RightChain™ Incorporated

Page 12

Covered in and by AI-based and conventional optimization.

CPO Case Picking Optimization DYO Dock Yard Optimization EPO Each Picking Optimization

RightChain™ Metrics | Warehouse Scoreboard

RightChain™ Moves | Material Movement Optimization

RightChain™ Pallets Pallet Picking Optimization

RightChain™ Cases Case Picking Optimization

RightChain™ Eaches Each Picking Optimization

MMO Material Movement Optimization

PPO Pallet Picking Optimization

RightChain™ Moves | Material Movement Optimization RightChain™ Docks | Dock Yard Optimization

WII Warehouse Insights & Intelligence

WSB Warehouse Scoreboard

RightChain™ Insights | Warehouse Insights and Intelligence

RightChain™ Incorporated

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Wisdom for Warehousing Warehousing 101 What is a warehouse? Warehouse Activities and Flows Warehousing Over Time Warehousing in Business and Supply Chain Logistics Warehousing and Supply Chain Logistics Warehousing and Customer Service

Warehousing and Inventory Warehousing and Sourcing

Warehousing and Transportation Warehousing and Order Fulfillment Warehouse Optimization The plight of the warehouse manager The perfect warehouse Best practices It pays to practice Warehouse optimization First things first Build with wisdom Deployment Direct shipping

RightChain™ Incorporated

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The Names and Roles of Warehouses in Supply Chain Logistics

Plant

Component Warehouse

Factory

Work in Process Warehouse

Raw Material Warehouse

Finished Goods Warehouse

Distribution Center Warehouse

Fulfillment Center Warehouse

Home Home

Store

RightChain™ Incorporated

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Warehouse Nomenclature Warehouses are often named and referred to by the type of inventory they house. Raw material warehouses house raw material. Component warehouses; components. Work-in-process (WIP) warehouses; work in-process inventory. Finished goods warehouses; finished goods. Warehouses are also named and referred to the role they play in a supply chain. Distribution centers, fulfillment centers, cross docks, storerooms, stockrooms, staging areas, consolidation warehouses, and bonded warehouses are some examples. Warehouses may also be named and referred to by their location and service area (e.g. local, regional, national, global); their ownership (e.g. public, dedicated, private); and/or by their handling units (e.g. parts warehouse, bulk warehouse). Though there are these disparate names, all warehouses receive, store, pick, and ship product. From that perspective, most, if not all of the principles, practices, and optimizations we share will have application across the universe of warehouse types, roles, and sizes.

Warehousing Over Time

Logistics Center

Mfg. Assembly Fulfillment Center

Distribution Center

Warehouse

Value Added Services

S T O R A G E

Order Assembly

Value Added Services

Order Assembly

Storage

1990’s/2000’s Just in Time Personal Computers Statistical Process Control Weeks Malls/Wal-Mart

2000’s/2010’s Lean/SCM Internet Six Sigma Days Online Shopping

2010’s/2020’s Mass Customization/3DM Mobile/Wireless Zero Tolerance Hours Omni Channel

1960’s/1970’s/1980’s Mass Production Mainframe Poor Quality Months Woolworths/Mom & Pop’s

RightChain™ | Supply Chains. Solved.

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The Role of Warehousing in Supply Chain Logistics

When the total cost of raw materials and key components is a major portion of the total supply chain cost, when the unit costs of those materials are low, when overall demand is high, when significant discounts are offered for large procurement lots, when there is low likelihood of obsolescence, and when inventory carrying rates are low, large procurement buys with associated large lot size inventory levels may be well justified. That inventory must be housed somewhere, and that somewhere is a warehouse, sometimes called a raw materials warehouse.

RightChain™ Incorporated

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Warehousing and Supply Chain Service

One very important area where warehousing adds value in business and supply chains is customer service, including facilitating high inventory availability, shorter response times, value-added services, returns, customization, and consolidation among others. Fill rate is the portion of a customer’s demand satisfiable from on-hand inventory. In most cases, a significant investment in safety stock is required to provide high customer fill rates. That safety stock must be housed somewhere, and that somewhere is a warehouse. Warehouses in close proximity to the customer base and with short internal cycle times help to reduce response times to customers. We have one client that provides same-day delivery of critical service parts. The company accomplishes this with a nationwide network of small warehouses with short order cycle times.

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RightChain™ Incorporated

Warehousing & Value-Added Services Following from the mass customization movement, the likelihood that an order will require customization in some form is increasing exponentially. The ability to execute the requisite value-added services such as custom labeling, special packaging, monogramming, kitting, coloring, and pricing is and will continue to be a competitive supply chain differentiator. Warehouses are uniquely equipped with the workforce and equipment to execute these logistics value-added services. As the physical facility closest to the customer location, a warehouse is also a natural place to customize, kit, assemble, or countrify products in accordance with the principle of postponement—minimizing overall inventory investments throughout a logistics network by delaying the customization of products to the latest moment. In our RightChain™ Inventory implementation with NuSkin we found that storing large batches of un-countrified inventory and countrifying on demand was a dominant supply chain strategy.

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RightChain™ Incorporated

Warehousing and the Value of Time Warehouses in close proximity to the customer base and with short internal cycle times help to reduce response times to customers. We have one client that provides same-day delivery of critical service parts. The company accomplishes this with a nationwide network of small warehouses with short order cycle times. One of our financial services clients supports its financial analysts with small warehouses located in the centers of major financial districts, serving financial service offices via subway, courier, walking, and bicycles. One of our convenience store clients is increasing product freshness by increasing delivery frequencies to its 14,000 stores supported by a major increase in the number and capacity of its warehouses and distribution centers. The current master of warehousing and the value of time is Amazon, leveraging warehousing to provide high availability of popular SKUs within hours of the large swaths of the US and soon to be global population.

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RightChain™ Incorporated

Warehousing and Production In high volume manufacturing operations, with high setup and changeover costs, low unit costs, low likelihood of obsolescence, and low inventory carrying rates, long production runs with associated large lot size inventory levels are well justified. That inventory must be housed somewhere, and that somewhere is a warehouse, often called a plant warehouse, due to its location contiguous with, adjacent to, or in close proximity to a plant. In our RightChain™ Inventory optimization work with Coca-Cola, we found that lot sizes were approximately half of what they should have been. The optimization led to the acquisition of a strategic warehousing footprint yielding significantly lower total supply chain costs, higher gross margins, and higher gross margin percentages.

Coca-Cola Plant Warehouse Charlotte, North Carolina

Coca-Cola Warehouse Charlotte, North Carolina

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RightChain™ Incorporated

Warehousing and Seasonal Inventory Some products have highly seasonal demand patterns. Optimizing the supply chain for those demand patterns may mean producing well ahead of demand in order to minimize the combined costs of manufacturing, inventory carrying, and warehousing. Such is often the case when manufacturing costs are the dominant component of total supply chain costs. Such was the case with our client Hallmark Cards. RightChain™ Inventory recommended level loading card production factories and volume throughout the year. The end result was dramatically reduced manufacturing costs and subsequently total supply chain costs. The investment in additional seasonal warehousing space was a quick payback and easy financial justification.

Hallmark Warehouse Kansas City, Missouri

RightChain™ Incorporated

Warehousing and Sourcing When the total cost of raw materials and key components is a major portion of the total supply chain cost, when the unit costs of those materials are low, when overall demand is high, when significant discounts are offered for large procurement lots, when there is low likelihood of obsolescence, and when inventory carrying rates are low, large procurement buys with associated large lot size inventory levels may be well justified. That inventory must be housed somewhere, and that somewhere is a warehouse, sometimes called a raw materials warehouse. In our RightChain™ Inventory optimization work with a large candy company, we found that sugar and cocoa were the most expensive components of total supply chain costs. We found that their purchase lot sizes were much smaller than they should have been. The optimization led to the acquisition of a much larger raw material warehousing footprint yielding significantly lower total supply chain costs, higher gross margins, and higher gross margin percentages.

M&M Mars Warehouse Atlanta, Georgia

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RightChain™ Incorporated

Warehousing and Transportation In high volume manufacturing operations, with high setup and changeover costs, low unit costs, low likelihood of obsolescence, and low inventory carrying rates, long production runs with associated large lot size inventory levels are well justified. That inventory must be housed somewhere, and that somewhere is a warehouse, often called a plant warehouse, due to its location contiguous to, adjacent to, or in close proximity to a plant. In our RightChain™ Inventory optimization work with Coca-Cola, we found that lot sizes were approximately half of what they should have been. The optimization led to the acquisition of a strategic warehousing footprint yielding significantly lower total supply chain costs, higher gross margins, and higher gross margin percentages.

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RightChain™ Incorporated

Warehousing and Order Fulfillment One customer service that is so foundational to our culture’s expectations of logistics systems and is often taken for granted is consolidation. For example, if you order a shirt and a pair of pants from a mail-order company, rarely would you want the shirt showing up one day in one package and the pants showing up another day in another package. For those items to show up at the same time in the same package, they most likely need to be housed under the same roof, that is, in a warehouse. Returns constitute another customer service facilitated by good warehousing practice. Convenient and inexpensive returns for customers yield higher sales and customer satisfaction ratings. Warehouses and distribution centers are typically already located in close proximity to the customer base and have the workforce and material-handling equipment uniquely suited to handling returns.

LL Bean Fulfillment DC Freeport, Maine

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RightChain™ Incorporated

Payless Shoes DC Redlands, California

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RightChain™ Incorporated

Warehouses Adding Value: Let Me Count the Ways

• Response Time • Value-Added Services • Consolidation

• Manufacturing Economies of Scale • Procurement Economies of Scale • Transportation Economies of Scale

•Delayed

Customization • Postponement •Visual Inventory Control •Inventory Accuracy • Seasonality Inventory •Bonded Warehousing

•Kitting & Assembly •International Order Preparation • Returns & Reverse Logistics • Pack and Hold •Marketing Presence

Supply Chain Service

Supply Chain Economies of Scale

Supply Chain Value Added Inventory

RightChain™ Incorporated

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The Plight of the Warehouse Manager

Under the influence of e-commerce, supply chain collaboration, globalization, quick response, and just-in-time, warehouses today are being asked to (1) execute more, smaller transactions, (2) handle and store more items (3) provide more product and service customization, (4) offer more value-added services, (5) process more returns, (6) serve more channels, (7) process a greater variety of order types, (8) receive and ship more international orders, and (9) provide higher levels of safety and security for people and property. At the same time warehouses today have (1) less time to process an order, (2) less margin for error, (3) less young, skilled, English speaking personnel, (4) under-developed systems capability, and (5) reticence to automate despite all the publicity surrounding warehouse automation. I call this rock and a hard place scenario the plight of the warehouse manager. Never has the warehouse been asked to do so much and at the same time been so strapped for resources at the same time.

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RightChain™ Incorporated

Warehouse Optimization In technical terms, optimization is an approach to decision making or problem solving that frames the issue at hand with an objective function and constraints. In warehousing, the objective is to minimize total warehousing costs. The constraints are the service, throughput, storage, safety, and security requirements. Total warehousing costs include the cost of labor, occupancy, material handling systems, and information handling systems. Service requirements (constraints) include inventory and shipping accuracy as well as inbound and outbound cycle times. Throughput requirements include peak and average inbound and outbound transaction rates at the docks and throughout the facility. Storage requirements, peak and average, are dictated by the inventory strategy and associated inventory peaks and valleys. Safety and security requirements are corporate mandates. RightChain™ Warehousing considers the full range of warehousing costs and constraints in crafting optimal warehouse designs.

Honda Parts DC Atlanta, Georgia

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RightChain™ Incorporated

Warehouse Activities and Flows

Warehouses come in many shapes and sizes, however, the vast majority include the following activities and areas. 1. Unloading 2. Inbound Staging and Inspection 3. Pallet Putaway 4. Pallet Storage & Retrieval 5. Case Picking Replenishment 6. Case Picking 7. Each Picking Replenishment 8. Sortation, Order Assembly, and Packing 9. Outbound Staging 10. Loading

Broken Case Picking

Case Picking

Pallet Storage and Retrieval

Case Pick Replenishment

Each Pick Replenishment

Order Assembly

Putaway

Cross Docking

Inbound Staging & Inspection

Outbound Staging

Unloading

Outbound

Inbound

RightChain™ Incorporated

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Practices in Place in Survey Warehouses

78.1%

Continuous Improvement Teams Popularity Slotting (Golden Zoning) Directed Putaway ABC Cycle Counting ASNs Pick Location Verification Productivity/Time Standards Putaway Location Verification Cross Training

RightChain™ Research has benchmarked warehouse performance and practice since the late 1980s. One of the common denominators of the highest performing warehouses in our research is the number and type of best practices employed. The most recent list and propensity of employment is illustrated in the graphic. Interestingly, two of the best practices yielding the highest impact on warehouse productivity are popularity slotting and interleaving, two with limited employment.

68.8%

64.2%

63.5%

61.2%

60.0%

54.7%

50.5% 51.0% 51.1%

RFID Tags Interleaving Weigh Checking Activity Based Costing Cross Docking Ergonomics Programs Item Cube Information

49.0%

44.8%

35.4%

29.0%

12.2%

7.4%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

RightChain™ Incorporated

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It pays to practice!

23.6%

World-Class (12 to 15)

41.9%

Not surprisingly, the number of best practices in place is a very good predictor of warehouse performance. Our research shows that for those warehouses with 12 or more RightChain™ Warehousing practices in place, a 42% increase can be expected. For those with 9 to 11 RightChain™ Warehousing practices in place, a 24% increase in warehouse productivity can be expected.

27.3%

17.0%

23.9%

Upper Class (9 to 11)

35.8%

8.3% 8.3%

Middle Class (6 to 8)

43.2%

0.0% 0.0%

Baseline (< 5) Stage (Number of Practices in Place)

47.1%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Productivity Rank % % Improvement vs. Baseline Stage % Improvement vs. Previous Stage

RightChain™ Incorporated

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