Chapter 5 Effective warehouse management

Question 1

Define effective warehouse management.

Answer 1

The effective warehouse management
standardizes the management of the distribution center by systematically structuring the
organization, setting goals, and identifying cost and performance levels. It is ultimately
simple day-to-day management, and it facilitates transparency to look for bottlenecks.

Question 2

What helps a warehouse to create transparency.

Answer 2

1. Service levels agreements.
2. Standard operating procedures.
3. Activity-based costing.
4. Performance indicators.

Question 3

What is the purpose of service level agreements?

Answer 3

The service level agreements will formalize the desired target levels. If quick delivery is important will be reflected in response time targets.
If heavy demand fluctuations must be accommodated it will be defined in the flexibility target.

Question 4

What is the service portfolio?

Answer 4

It should be used to ensure the collaboration between the distribution center, their clients and other members of the supply chain. The portfolio lists the services as well as the service level rates the distribution center provides. It tells parties what they can expect from the warehouse as well as letting the warehouse staff know what is expected of them.

Question 5

What information should be included in the SLA.

Answer 5

1. Service definition and purpose.
2. Performance targets, tracking and reporting.
3. Service fees.
4. Client duties and responsibilities.

Question 6

Why should the SLA include the service definition and purpose?

Answer 6

The SLA should state why a service is provided and how it adds value to the client. The four ways the warehouse adds value to the client is through breaking bulk, storage, consolidation and customization. This is done both through goods flow and information flow. The service definition helps clients understand what they can and cannot expect from a service. It is also important to know which elements provide value to clients. - For example, if goods are sorted before putaway to ensure speedier delivery it adds value for the client. If it is done because it is just a more convenient warehouse procedure, there is no direct value to the client.

Question 7

How can service level performance be measured?

Answer 7

1. Responsiveness
2. Accuracy
3. Flexibility

Question 8

What are the parameters of responsiveness in the context of performance targets?

Answer 8

1. Response times - How soon delivery will take place after the receipt of the sales order.
2. Frequency - How often a client can order a service.
3. Time frame - The length of time in which a delivery will take place.
4. Fill rate - The percentage of orders completed on time.

Question 9

What are the two different response times?

Answer 9

1) Prearranged response time - Define upfront for each individual service request how soon it should be completed, e.g., all orders are shipped within 24 hours. Different prearranged response times may apply to different clients of the DC. Can be part of the sales agreement (applicable to all sales) or by agreement with individual customers.
2) Negotiated response time - Are determined separately for each request. This applies when there are no formal agreements or when the customer does not want the goods ASAP, but rather at a specific moment when he has the resources to receive the goods.

Question 10

Reasons why a service might be late.

Answer 10

1) There is insufficient stock. (responsibility of the source function)
2) The goods are delivered too late to the loading dock. (responsibility of the distribution center)
3) Transportation to the customer takes too long. (responsibility of the transportation planning function).

Question 11

Explain what is meant by accuracy and how it can be measured.

Answer 11

The accuracy rate defines for each service the minimum percentage of service requests which should be performed accurately. Accuracy rates for inbound handling, outbound handling and VAL are typically measured as the percentage of order lines that are correctly processed. The following dimensions are considered:
(i) Product
(ii) Quantity
(iii) Condition
(iv) Information
Accuracy for the storage service is typically measured through cycle counts – the number of counts that revealed a correct inventory as percentage of the total number of counts.
Inventory discrepancies may be caused by picking errors, damage, etc. The financial value of the inventory discrepancies is also an important indicator.

Question 12

Why is flexibility important as a performance target?

Answer 12

Flexibility -the capacity of a warehouse to accommodate variation in the amount of service. (the volume range that the DC can accommodate per client and service).
A DC is designed to accommodate a certain workload. If the DC has to process significantly higher volumes, then it might not be able to complete all the requests in time or only at a much higher cost. If the volume is a lot lower, then it might lead to the underutilization of staff and resources. By including the flexibility in the SLA’s, the DC guarantees its clients that it can fulfil any volume within the range against the prescribed conditions. If volumes go outside the limits, then the distribution center cannot guarantee the performance targets (or can only meet them at a higher cost).

Question 13

Why do companies experience fluctuations and what can the distribution center do to accommodate fluctuations?

Answer 13

Some companies experience high fluctuations in order volume because of seasonality, volatile product life cycles etc. These companies demand high flexibility from their distribution centers.
The DCs should have:
i. flexible contracts with their staff,
ii. close arrangement with employment agencies, and
iii. excess capacity within operations.

Question 14

Explain how service fees helps with process efficiency.

Answer 14

Charging service fees is a powerful instrument for optimizing the activities in the supply chain. A necessary condition is that fees are realistic making clients aware of the actual costs involved in logistics services.
This helps clients to look for ways to adjust their orders and delivery patterns to avoid excessive demand on logistics resources and thereby reducing costs.

Question 15

Why are control rules needed in the SLA?

Answer 15

Control rules are needed to deliver consistent service. They can be managed by the WMS or incorporated through procedures for operators. Control rules include:
- FEFO (first expired first out)
- FIFO (first in first out)
Other decisions and exceptions to consider:
- What to do when supplier delivers late.
- What happens when delivery is earlier than expected.
- How to handle orders placed after cut-off time.

Question 16

What are client’s duties and responsibilities in the SLA?

Answer 16

• Clients also have some responsibilities to ensure a smooth logistic process.
• The transportation planning function has the duty to plan the outbound trips and inform the DC in time.
• Likewise, the source function should ensure that deliveries are pre-notified and well documented. For some of these duties we can also define target- service levels for the clients, such as 95% of the deliveries are pre-notified.

Question 17

How does standard operating procedures help the warehouse become more effective?

Answer 17

1. It helps management and staff have a clear understanding of the processes.
2. It allows managers to see the overall impact of problems instead of looking at each problem individually as it arises.
3. While documenting the processes, managers find ways to standardize processes and procedures and should adopt the best approach to get all operators working in the most efficient way.

Question 18

What are the success factors for achieving good results with SOP?

Answer 18

1. Operators understand and follow the specified procedures. Having procedures in place is not enough and it is important that the operators understand and follow the procedures. The managers should introduce and actively promote the specified processes on the work floor. The specifications also serve as training material for new employees. The managers must also link the job descriptions with the tasks, authorities, and responsibilities of the operators.
2. Inappropriate conduct is actively challenged. The specifications also present the best procedures for safeguarding safety, ergonomics, hygiene, efficiency, and quality.
3. Standard operating procedures are kept up to date. Procedures should be kept up to date and each change in procedure, systems or product flow should immediately be incorporated in the standard operating procedures. Managers should inform the operators and manage the implementation of changes.
   Two reasons for changing processes exist:
   (i) Improve processes.
   (ii) Accommodate new services.

Question 19

Explain what is activity-based costing and how it can be used for warehouse efficiency?

Answer 19

Activity-based-costing - Considers all costs in the warehouse budget, for example building fixtures, equipment, materials, staff, inventory and overhead, and assigns these costs to activities.
Consequently, the cost of activities become significantly higher than just the time and material costs.
The Information Can Be Used For Different Purposes.
1. Activity based costing creates awareness. Managers and staff realize the costs of inefficiency, rework, redundant activities, dead stock, etc.
2. It can be used for the analysis of processes. Often managers must decide to change the processes based on their gut feeling, but an ABC analysis provides true facts.
3. Discussions between the DC and other departments are facilitated. By quantifying the costs of rush orders, frequent deliveries, poor supplier performance and high inventories, other departments might change their behavior in order to reduce overall costs.

Question 20

Why is activity-based costing considered to be a strategic model?

Answer 20

• Activity based costing is considered to be a strategic model rather than an operational model because it turns committed costs into variables (for instance, building costs being spread among individual transactions). It treats committed resources and flexible resources alike. This falls in line with the objective of highly competitive warehouse management to create long-term improvements.

Question 21

Identify the problems with traditional activity-based costing and explain the TDABC model as a way to address these limitations.

Answer 21

The traditional activity-based costing model has been difficult to implement because of several problems:
* It is time consuming and costly to identify the time that operators spend on activities through interviews, observation, and surveys.
* The model is difficult to scale. Adding a new activity requires re-estimating the amount of cost that should be assigned to the activity.
* When the size of the model increases, the number of variables escalate, thus the consumption time increases dramatically.
* When operators distribute their spent time between activities, invariably they report percentages that add up to 100 percent. Idle or unused time is not reported.

Design of a TDABC model in the DC

1. Cost factors
   TDABC starts by gathering the cost items from the warehouse budget. Cost can be rent, lease, mortgage, fees, salaries, depreciation, and/or interest on capital employed.
2. Cost allocation
   After identifying cost items, the model allocates the items to processes. The cost items in the budget are allocated to four processes, inbound handling, storage, outbound handling, and VAL. If the actives performed in these processes use a different mix of resources, the process breakdown should be further refined.
   E.g. building cost will be distributed to processes relative to the amount of warehouse space taken up.
3. Capacity measures
   TDABC drives the costs in each process to individual transactions, products, orders, services or customers based on the amount of capacity that is used. Typically, the model measures the capacity of a process in terms of the available time from staff or devices.
   - In the DC the capacities in inbound handling, outbound handling and VAL are measured in seconds of operator or machine time.
   - Storage is measured in cubic meters; thus, warehouse space is one of the exceptions in the TDACB where the capacity is not time-driven, but volume-driven.
4. Standard times
   TDABC uses an estimate of the time to perform a transactional activity, i.e. the standard time.
   The standard times can either be obtained through direct observation, or, preferably, through the analysis of historical transaction data from the WMS. This replaces the process of interviewing people to learn how much time was spent on an activity.
   - Standard times are used to determine rates for services. While physical activities are preferably charged by physical units (pallet, case, piece), storage will typically be charged by volume consumed (m3). Administration services will be charged per order or order line.

Question 22

What three behavioral effects contribute to overall performance?

Answer 22

1. Understanding - staff members should have an accurate and up-to-date view on the achieved performance.
2. Motivation - Operators experience the PIs as a tool to improve performance rather than as a means to control their activities.
3. Focus on improvement - Operators understand the relationship between PIs and company results. They make decisions that positively influence the overall company results.

Question 23

What are the four stages of Performance indicators that lead to success?

Answer 23

1. Defining performance indicators - The KPI’s should give a complete view of the warehouse performance and measure all dimensions specified in the SLA and include productivity, availability, accuracy and flexibility.
2. Introducing performance indicators - After defining the performance indicators it is necessary to introduce them to the DC. To be successful at implementing them it is necessary to have management commitment, cross-departmental involvement as well as operator involvement.
3. Reporting management information (reporting performance indicators) - Detailed data is captured by modern WMS and should be converted into useful management information so the managers can analyze the performance of operators.
4. Performance management - The PIs should be used to manage and optimize operations. It should be an inseparable element of the day-to-day operations.

Question 24

What aspects should be included in KPIs?

Answer 24

1. Safety – warehouses can be dangerous, with many vehicles and pedestrians traveling side by side in narrow spaces along heavy materials. Therefore safety is a top priority. Typical safety KPIs = (i) number of reported incidents per period, (ii) number of incidents resulting in work absence per period or (iii) number of days since last incident.
2. Satisfaction – Operators who enjoy their work will perform better, are more easily motivated, and seek opportunities to grow. Employee satisfaction can be measured through periodic surveys. Feedback from the surveys can help managers better understand employee frustration and trouble and take action to create a better workplace.
3. Sustainability – Warehouses should be aware of their environmental footprint. Sustainability KPIs motivate managers and operators to reduce that footprint. Sustainability KPIs = (i) energy consumption, (ii) usage of packaging materials and (iii) amount of waste.
4. Be up to date - If performance indicators are provided to operators daily then they can learn from their errors and performance will continuously improve.
5. Be unbiased - The KPI should provide an unbiased view of the performance. Measures to prevent bias in the KPI’s include productivity, availability, accuracy, and flexibility.

Question 25

Explain briefly the four unbiased measures.

Answer 25

1. Productivity - If operators achieve higher productivity than expected, then the actual costs are lower and the margin on service fees increases. However, if their productivity is lower, then the margin drops or becomes negative.
2. Availability - The fill rate measures whether services are available on time. We can measure the fill rate of inbound handling, VAL, and outbound handling services by the on-time percentage of orders, order lines, deliveries, delivery lines or handling units.
3. Accuracy - Measures the accurate services provided as a percentage of the total services provided:
   The accuracy of inbound handling, VAL and outbound handling services can be measured as the percentage of orders, order lines, deliveries, delivery lines or handling units that are accurate.
   The accuracy of the storage process (inventory accuracy) is measured by the number of storage locations with the correct contents as a percentage of the total number of locations. The inventory accuracy is determined through cycle counting.
4. Flexibility - Flexibility is the capacity of a warehouse to accommodate variation in the amount of services.
   The SLA defines flexibility limits for services. These limits can be used to assess 2 flexibility indicators:
   - Does the DC satisfy its flexibility target? (Does it achieve KPI targets on days where orders are very flexible)
   - Does the DC provide sufficient flexibility?