November 2004 | Commentary | 3PL Line

Mission Possible: Expand Business Without Adding DCs

Tags: 3PL

Suppose you are in charge of supply chain management for a retailer with 1,150 store outlets, eight distribution centers, and a network of 600 vendors. You are tasked with building the optimal supply chain to support three times the current business volume seven years from today.

The DCs are already jammed with inbound shipments and outbound store delivery truckloads, and the DC managers are asking for more space just to support the current demand.

What do you do?

If eight DCs are already struggling to support existing business volume, how many more DCs would you need to support an expansion plan to, say, 3,500 stores? This situation actually presents a golden opportunity for a thorough review and possible reengineering of the supply chain infrastructure and process.

When determining how to enhance supply chain performance, consider three critical elements: purchase orders, infrastructure, and logistics management process and technology.

1. Purchase orders. Purchase orders are typically generated from an order management system or warehouse management system, based on certain defined ordering policies and parameters, such as minimum inventory level requirement, order lead time and variance, order frequency, and minimum order quantity.

Sometimes, however, an order quantity is determined based on the vendor's volume or promotional discount. A good order quantity calculation should also consider the product's packaging and shipping characteristics.

For example, does the quantity create whole truckloads, whole pallets, whole layers, or whole cases, instead of partial ones? Are the packaging dimensions shipping-friendly? The correct purchase order quantity should help maximize the cube utilization inside a trailer or container.

In addition, there is a delicate balance between inventory level and the frequency of orders. The more frequent the orders, the less inventory stored. Unfortunately, more frequent orders mean smaller order quantities, which may lead to higher transportation cost.

Some purchasing managers neglect a critical element in efficient purchase orders: the order due date. Some retailers allow vendors a long due-date window—for example, any day during a certain week—for the delivery of a product, while other retailers may require a specific date for delivery at the receiving dock.

When a retailer has a capable inbound logistics management program and is responsible for inbound transportation, however, the retailer will also specify a date and time window to pick up the product from the vendor's shipping location.

This tight control over inbound freight reduces the variance in order lead time, shortens the transit time, and reduces the required inventory level while maintaining a high order fill rate.

2. Infrastructure. The retail supply chain infrastructure includes vendors' shipping locations, retailer DCs or warehouses, crossdocking facilities (if separate from the DCs), and retail store locations.

In a typical retail product flow, once a vendor receives the purchase order, the product moves from the vendor's shipping docks to the retailer's DCs/warehouses, crossdocks, and then on to the stores. Some products may be shipped directly to stores, bypassing intermediate points entirely.

On the surface, all retail supply chains look alike, but their performances can vary drastically. To optimize a retail supply chain infrastructure, the total system must be examined—from the point of sale (stores and customer locations), back to the point of supply (vendor shipping locations), and every point in between (warehouses, DCs, and crossdocking locations).

At the strategic level, you can determine the optimal number, size, and location of the intermediate service facilities, such as DCs and/or crossdocks, once you have the store locations and vendor locations.

Simultaneously, assigning stores to the appropriate distribution centers can also be optimized. This is commonly referred to as the location-allocation problem in operations research. Often, the DCs are already in place, and cannot be changed or relocated in a short time frame. There is still the opportunity, however, to re-optimize the service assignment of stores to the existing distribution centers.

If a high percentage of less-than-truckload (LTL) shipments moves inbound to each individual distribution center, then a huge potential exists to re-engineer the flow of inbound freight by introducing crossdocking operations at the DCs. This effectively converts the LTL mode into truckload (TL) mode, and speeds the product into store delivery shipments.

The mode conversion from LTL to TL typically generates double-digit percentage savings in freight cost, and frequently provides additional loading efficiency for the fleet operations performing store deliveries. Crossdocking dramatically reduces the time from supplier shipment to store delivery, and thus creates substantial reductions of idle inventory.

3. Logistics management process and technology. The best practice of inbound logistics management calls for integration and synchronization of vendor selection, order fulfillment, purchase order release, and transportation of products from vendors' shipping locations to DCs, warehouses, and stores. Once purchase orders are issued, the transportation management system (TMS) calculates the weight, cube, and number of pallets, based on order quantity and shipping requirements.

Some purchase orders can individually take up one or more full-truckload shipments, where others may be just a few pallets or a partial truckload. If there are a lot of LTL shipments to each individual DC, then there is an obvious opportunity to re-engineer the flow of inbound freight, using processes such as LTL consolidation or crossdocking.

The TMS determines the best transportation mode, utilizing regional pool or crossdocking operations, to consolidate LTL shipments into truckloads. The transportation planning and execution requires time-definite pickups at the vendor shipping locations. The TMS allows vendors to access the shipment plan and visibility through web applications that provide not only the pickup schedules, but other information including loading requirements and shipping document preparation.

The TMS also optimizes the assignment of loads to carriers, which helps minimize transportation cost and meet service requirements.

In short, a best-practice retail transportation management system should perform the following functions:

  • Process purchase orders into shipping requirements—for example, weight, cube, pallets, truckloads.
  • Optimize the mode of transportation—parcel, LTL, TL, intermodal—for each shipment.
  • Determine best crossdocking/pooling options and LTL consolidation.
  • Assign carriers to shipments optimally, based on contracted rates, to minimize total transportation cost and ensure on-time pickup and delivery.
  • Provide web-based applications for all parties to coordinate the shipment plan and execution.
  • Manage and monitor transportation activities, with web-visible track-and-trace features.
  • Perform freight bill audit, payment, and reporting.
  • Provide management reporting of service and cost results.

Now, go back to the situation described at the beginning of this column. It is a true story that took place in 1996. Seven years later, the 1,150-store retailer grew into a 3,500-store retail leader, using only the original eight distribution centers. It was able to turn the logistics challenge of seven years ago into a competitive advantage today.

So, in reality, how many new DCs were added to support three times the business volume growth? The answer is none.