MANUAL LABOR

In most distribution facilities, `hands-on’ means just that, and labor retention is more urgent than technology upgrades. The results of our comprehensive survey of material handling practices

Comparisons may be odious, but they are, alas, necessary if it’s vital for you to know how you stack up against the competition. Hence the popularity of benchmarking. If there’s one question that readers of Operations & Fulfillment have repeatedly asked us over the years, it’s whether we offer any numbers on how the “average” DTC fulfillment operation performs. What are the yardsticks that they should measure themselves against?

Unfortunately, direct-to-customer fulfillment has traditionally been a function about which statistics are hard to come by. What little is available has usually been pieced together from corporate marketing and sales figures, shipping data, and less commonly, records of online transactions. To fill the information gap, O&F has launched a series of surveys that zero in on DTC fulfillment as it actually takes place today in warehouses and distribution facilities around the country. In this issue, we present the results of our first study, an in-depth exploration of material handling practices.

A word of caution – our findings in no way suggest what an “ideal” operation should do. The vast differences in size among our sample companies would alone preclude any kind of generalization as to standards or best practices. What we did obtain, though, was an unprecedented look at how people in material handling operations carry out their daily tasks. You’ll find information here about what equipment and staff they have available, how productive they are, how often they meet goals on the job, and how well they satisfy customers.

Among the 80% of respondents who are not third-party fulfillment services providers, 84.2% handle fulfillment in-house; 15.8% outsource it. This pattern doesn’t vary greatly by company size (less than or more than $50 million in annual sales). Answers vary widely regarding fulfillment facility size, but the median is 50,000 sq. ft. The average respondent operates one fulfillment center; of the 82 respondents who answered this question, 54 operate one facility; 19 run two to three facilities; and 10 handle more than three. During peak season, median daily shipments total 1,700, although this number should be viewed with caution – 19.3% of the 81 respondents handle fewer than 250 shipments, while 14.5% handle 10,000 or more. Off-peak, median daily shipments are 500.

As can be expected, reality doesn’t live up to hype. Despite media hoopla about e-technologies and facility automation, in a typical day only 12.5% of customer orders are processed electronically; most are handled manually (35.7%) or through batch processing (37.9%). Forty percent of firms with sales of $50 million-plus process up to 24% of their orders by manual methods, and among companies with sales under $50 million, 20.8% of respondents say they handle 100% of orders manually. Real-time order processing, touted as the wave of the future, has yet to have a significant presence in the average fulfillment facility; 61.4% of total respondents do not handle any orders in real time. Only 6% process between 50% and 75% of their orders in real time, and a minuscule 3.6% process all their orders this way. The results are similar for electronic order processing – 59% don’t use it at all; 7.2% employ it for a quarter to half of all orders; and only 2.4% handle all orders electronically.

The majority of respondents use bin shelving, conveyors, flow racks, bar coders, and manual sortation systems. More advanced technologies have yet to make inroads into the majority of fulfillment facilities – only 7.2% of respondents use pick-to-light (PTL) systems, and a meager 1.2% employ voice recognition (VR) software. However, radio frequency and route optimization software are becoming more common, used by 27.7% of respondents.

Giving it back Close to half of all respondents report return rates of 2% to 9%. Nearly a third of respondents in the $50 million-plus category say that 10% or more of their orders come back. Liquidation methods run the gamut from outlet stores to sale catalogs to warehouse sales, with the most widely used tactic being returning the item to the vendor (53%). Interactive and electronic catalog sales come in second (37.3%) and sale catalogs third (36.1%).

Backorders continue to be troublesome in the fulfillment business. Over a quarter (26.5%) of all respondents (and close to a third in the under-$50 million category) say that 10% or more of customer orders go on full or partial backorder. The number of respondents reporting 2% to 4% of orders on backorder is also fairly high – 27.7%. The median number of inventory turns in 2000 was four. The median time targeted, and actually taken, to ship an order is within 24 hours of receipt, but only 9.6% of respondents meet order shipment targets 100% of the time. Over a third (33.7%) achieve their goals 95%-98% of the time, and a surprisingly small number, 18.1%, do so 99% of the time.

Respondents clearly place a priority on quality – 97.6% conduct quality checks on customer orders. Among those who do, 87.7% perform the tests manually. Over half of all respondents (51.9%) check all their orders, while 30.9% conduct random checks and 11.1% test a statistical sample. Customer satisfaction, however, is a less important item on the agenda, with 34.9% of respondents not measuring it formally. Among the 65.1% that do measure it, the most common methods are customer satisfaction surveys (72.2%), return and/or cancellation rates (55.6%), in-package customer surveys (48.1%), and e-mail follow-up (37%).

The human factor Full-time staffing practices vary widely. Fulfillment facilities report that they employ anywhere from one employee to 200 or more; again, the median numbers, 27 workers at peak and 25 at off-peak, may be more reliable statistics. The median number of temporary workers ranges from zero at off-peak to 10 during peak periods.

Respondents were asked to rank the issues most important to them on a scale of 1 to 6, with 1 representing “not at all important” and 6 “extremely important.” Averaging the responses, the most crucial issues are labor retention (4.9), upgrading information technology (4.8), performance measurement (4.8), systems integration (4.6), and e-commerce (4.5). About a third of total respondents assign a ranking of 6, or extremely important, to labor retention (32.5%), e-commerce (31.3%), performance measurement (28.9%), and upgrading information technology (28.9%). However, importance varies by company size: For example, 40% of the larger companies in the sample say labor retention is extremely important, compared to only 27.1% of the under-$50 million firms, and 34.3% of the companies with sales of $50 million or more consider systems integration extremely important, as opposed to only 10.4% of the smaller firms. International fulfillment, outsourcing, legal/tax issues, and reverse logistics fall lower on the scale, with an average ranking of 3.2.

Tech flex To add diverse points of view to our survey, we asked senior DTC operations executives to comment on the findings. Jerry Owens, senior vice president of distribution at Williams-Sonoma, cautions against investing too much in technology too soon, even if volume increases. “We are planning to upgrade our systems and technology much further, but you cannot do it all at once. You must also avoid technology for technology’s sake – it must be applied appropriately to your order profile.”

The Williams-Sonoma operation includes retail, catalog, and online fulfillment, and handles a huge assortment of products. “The amount of technology in our buildings varies, with less of it in the furniture operations and more in assembly within conveyable direct-to-customer operations.”

Owens points out that although technology offers speed and consistency, it sometimes hampers flexibility. For instance, he says, if the velocity, cube, and weight of your products change often, approach automated material handling systems carefully.

Although companies now view fulfillment as a function providing competitive advantage, many new and smaller merchants cannot yet afford major investments in fulfillment technology. “Brick-and-mortar and catalog companies that already have systems in place and can leverage volume to get a payback from further investment have some advantage in building fulfillment excellence,” Owens says.

But the customer’s reaction is the ultimate test of a firm’s commitment to excel, he adds, and that’s where direct merchants fall short. “You must measure the customer experience to evaluate quality of service at the point of receipt rather than at the point of shipment,” he says. “Many companies are still talking about how fast they ship, when all the customer wants to know is when he is going to receive the item.”

Bells and whistles Cataloger/retailer Fingerhut is ahead of the curve in implementing technology, according to Michael Barrett, director of distribution at Fingerhut subsidiary Tennessee Distribution Direct. The facility in Tennessee uses pick-to-light as well as radio frequency on all its trucks, supported by a fully integrated WMS system that tracks product from receiving to shipping. “We currently process our orders in batch quantities and are looking at ways to successfully manage the cost associated with real-time order processing,” Barrett says. “Real time can be done today at a cost, but the successful people will be able to do it and still control the cost of distributing the package.”

In addition to manual quality control checks, every Fingerhut package is “measured systematically against what our WMS indicates it should be with regard to cube and weight,” says Barrett.

Get feedback For pure-play retailer Garden.com, customer satisfaction is paramount. “We have a rolling satisfaction summary that we aggregate monthly, along with other spot surveys,” says COO Jamie O’Neill. “This is a key advantage of working online – you have very easy access to your customers, and they are very willing to give you feedback.”

He points out that his company keeps its backorder rate below 3%. “We control the availability of products on our site closely and let customers order only items that are in stock. Otherwise, they can request that we send them an e-mail when the product is available again.”

Only the best Although our survey didn’t attempt to define best practices, many of the responses don’t measure up to what may considered such, according to Doug Bley, director of customer care at ClickShip Direct, Inc. (formerly Damark). Certainly, he says, the manual sortation systems that are so widely used aren’t best practice. “[At Damark], we used automated sortation systems for diverting product based on shipping container type and carrier assignment.” Bley also advocates advanced technologies, particularly pick-to-light, which, he claims, “helps productivity as well as accuracy.” One exception he makes is voice recognition technology, describing it as “too new and expensive” to implement.

While the Damark facility didn’t get as far as real-time order processing – which Bley labels “difficult” – most other procedures were automated, with “incredible flexibility to wave by any number of variables based on service needs, warehouse locations, product types, or labor efficiency.” Other items on Bley’s list of best practices to shoot for: process improvement and technology to minimize the need for labor, a backorder rate of under 5%, and formal quantitative and qualitative customer satisfaction measurement.

Perhaps the best practice of all is to hire and retain top performers. “No matter how automated you want to be, people are still the drivers of this business,” asserts Irwin Langer, director of operations at Gardener’s Supply. “If you don’t have a good person in the driver’s seat, the Cadillac just sits there and rusts.”

Furthermore, how much you automate depends on the products you sell. For example, in the gardening industry, “automated quality checks don’t work if you’re shipping dry dirt and wet dirt.”

Differences like these are what make external benchmarking problematic, Langer believes, and it doesn’t help that business functions commonly measured are often defined differently by different people. “Set the right goals, and make sure you’re measuring a balanced perspective,” he advises. “With us, it’s turn time plus an error rate, within a certain range. For example, one measure is the number of mail orders entered matched with the percentage of accuracy.”

Stay clear of too much high tech, Langer warns. “Consultants make it sound great, but we’re still at the stage where we’re shouting, `Hey, Joe, throw me another one!'”

In August 2000, Intertec Planning and Research, a division of Primedia, Inc., mailed cover letters and two-page questionnaires (each containing 28 questions) to 1,000 domestic O&F subscribers selected by operations job functions on an nth-name basis. A follow-up mailing was sent in September 2000 to non-respondents. By October, 97 surveys were received. Two of these were incomplete, resulting in a total of 95 usable surveys, for a response rate of 9.5%. Means and medians were calculated according to standard statistical practices. Results were reported in two categories: companies with annual sales under $50 million, and those with $50 million or more.

Merchandise and services sold include apparel, home and garden items, gifts, sporting goods, toys, groceries, books, music, computers, electronics, and travel. Respondents hold management positions in overall operations (42.1%); fulfillment (20%); warehousing (15.8%); facilities (7.4%); online/e-commerce (1.1%); and other areas such as logistics, services, inventory, and merchandising (12.6%). One respondent did not answer the question related to primary job function. Sales volume breaks out pretty evenly: 28.4% of the responding companies sell under $10 million in merchandise annually; 30.5%, $10 million to $49.9 million; and 41.1%, $50 million or more. Among the total respondents, an average of 60.7% of sales comes from catalogs; 11.9% from traditional retail; 11.3% from online/the Internet; and 16.2% from other sources such as direct mail, showrooms, telemarketing, and wholesale. Slightly over half of the respondents get 50% to 99% of their sales from catalogs; 54.7% generate 1%-24% of sales online; and 27.4% generate 1%-24% of sales from traditional retail, while 49.5% do not have any retail sales. Forty percent sell directly to consumers, 36.8% to businesses, and 18.9% to both consumers and businesses; 4.2% did not answer.

Manual sortation systems are most common (51.8%).

Advanced technologies are not widely used (PTL, 7.2%; VR, 1.2%).

Order processing is largely manual (35.7%).

Few orders are processed in real time (13.8%) or electronically (12.5%).

Batch processing is most common (35.7%).

Labor retention is most frequently ranked as “extremely important” (32.5%).

Backorder rates remain high (10% or more at over a quarter of the firms surveyed).

Quality checks are a high priority (97.6% conduct them).

Most quality checks are done manually (87.7%).

Customer satisfaction measurement is limited (34.9% do not measure it formally).