It’s in There

Nov 01, 2001 10:30 PM  By

Dream on, about the warehouse infrastructure that you’d love to have but can’t afford, about the new systems that you’ve been told will save you money even though you’re at a loss to cost-justify them. Business-school methods may seem oh-so-logical but, as you’ve learned by experience, they frequently turn out to be not only too expensive to implement but of questionable relevance or value for your operation.

In the harsh light of day, the truth is that although every one of the hardware, software, or management solutions that promises a reasonable return on investment (ROI) is a legitimate option for the right situation, none of them is a panacea.

Rough diamonds

What does work is careful consideration of the specific circumstances of an operation. In the nineteenth century, the lecturer and preacher Russell Conwell, founder of Temple University, made his fortune with a talk (and later a book) titled Acres of Diamonds in Your Own Backyard, which preached the value of capitalizing on your own available resources. “Your diamonds are not in far-away mountains or in distant seas,” said Conwell. “They are in your own back yard if you will but dig for them.”

Conwell’s advice couldn’t be more appropriate for creating efficiencies in your own fulfillment operation. The people who know the most about what’s wrong with it, and who probably have the best ideas about fixing those problems, are the people who work in the warehouse everyday.

Ask each of those employees to tell you the three most annoying or counterproductive things about the way they are forced to do their job, and you will get a shopping list of how to cut costs in a big way.

There is more than the element of obvious common sense to this suggestion. A vast majority of direct-commerce facilities have evolved in a very haphazard way. The “greenfield” facilities built from scratch are the exception, not the rule. Many catalog and e-commerce companies started with a facility more or less adequate to their needs, and have added to it over time. As order volumes grow, new systems and infrastructure are put into place that are often well suited to immediate needs, but less appropriate over time as the company experiences even greater growth. And when growth leads to multiple warehouse locations, a whole new set of challenges must be met, and many of the systems, procedures, and equipment in place are no longer optimum solutions.

Add to that typical evolution the highly seasonal order volumes of most direct-commerce companies, and a lot of the standard wisdom of the logistics business just doesn’t apply. Even if you had a static operation and could afford to start over, you would have to be very certain that the advice you get is based on direct-commerce fulfillment expertise.

That’s a moot point if you’re not starting over. If you are looking for ways to make incremental improvements, your current managers and their hard-working staff people are your best source of ideas.

Christian Books in Peabody, Mass., is a good case in point. Notes Ray Hendrickson, senior VP, “When we expanded from 25,000 titles to more than 100,000, we had to expand our zone picking by adding a check lane and a shoe sorter for postal sorts.” Since books are the primary product shipped, two-thirds of the orders in the check lane can be weight-confirmed, while the other third are manually confirmed with bar code wanding of UPC codes.

“When we expanded, the biggest change we had to make was moving from license-plate tracking of shipping cartons to tracking from the order number on the shipping address label,” says Hendrickson. “But with our current sales trend, we are likely to max out on wave picking very shortly and we’ll have to move to a wave pick. That’s going to be a major challenge.”

Pick your own

Technology is not always the answer. Tom Lagaly of Real Time Solutions, an FKI Logistex Company with headquarters in Emeryville, CA, notes, for example, that adopting radio frequency hand-held units for a paperless picking operation can actually reduce picker productivity by up to 20% because “with paper picking, pickers can look ahead and think ahead to plan their movements,” whereas with RF, the picks are generally displayed sequentially, one at a time. Add the cost of RF hardware and software, and you’ve just gone one step backward then two more for good measure.

Lagaly, however, is a strong proponent of pick-to-light configurations. “It’s not the volume of orders picked that determines the cost-effectiveness of pick-to-light,” Lagaly says. “It’s the number of pickers. If you have more than ten pickers, it can generally be shown to be cost-effective.”

He does caution, however, that the flow-rack infrastructure most often associated with pick-to-light is appropriate only up to velocities of about forty cubic feet per SKU per day. Above that, one-third pallet racking with bulk above and pick shelving below is more efficient.

Indeed, for very high volumes, one-third pallet racking seems to be the ideal solution for a “pick/pack,” direct-commerce fulfillment operation. A cosmetics company processing in excess of 16,000 orders per day, all from flow racks, is spending almost twice what it could be spending on fulfillment if it used one-third pallet racking, according to a study by Art Avery of Art Avery and Associates.

A similar over-dependence on flow racks adds a two-thirds penalty to the cost of fulfillment in a smaller operation doing less than 2,000 orders per day, because there is not enough room in the 150,000-sq.-ft. warehouse to use one-third pallet racking. Does the $175,000-per-year “penalty” cost-justify expanding the warehouse? Perhaps, but the point is, this is the kind of consideration required to run a truly cost-effective fulfillment operation.

Hammers and nails

One obvious problem in trying to achieve cost-efficiency is too many hammers looking for nails, even when it’s not always a hammer that’s needed in the first place.

There’s a little-discussed phenomenon in the direct-commerce fulfillment business, namely, the preponderance of warehouse and logistics experts who have come out of the wholesale distribution field, and who tend to see direct-commerce fulfillment as essentially a broken-case or pick/pack environment, which to them is an “exceptional” situation that defies classification by the norms and standards of high-volume, case-lot, and pallet movement. Adapting the norms and standards of case-lot and pallet movement distribution centers to a high-turnaround environment where high volumes of small orders are shipped to individuals at work or at home can be a daunting effort in cross-cultural understanding.

Even when these facilities experts have developed an expertise in catalog and direct-commerce operations, they are all too often focused on simply driving efficiencies in workflow. After all, that’s their professional mandate. The truly great ones, however, will understand something that typical warehouse logistics consultants often do not: The direct-commerce businesses refer to “fulfillment” because the goal is not simply to process the order quickly and accurately, but to satisfy the customer in that moment of truth when the delivered item arrives. Attention to details that make that moment pleasing and gratifying are vital to long-term customer satisfaction, particularly in a competitive environment.

There are still some catalog companies, for instance, who believe in hand-written gift notes. Sure, you can laser-print handwriting on a packing slip at considerably reduced cost. But if handwritten gift notes convert more gift recipients as customers than laser printing does, they will make a big positive impact on the bottom line. Fulfillment need not be a loss leader, but investments in packaging, presentation, and customer-friendliness need to be considered as part of the ROI equation, too.

Backlash

This logic can also be directed toward reducing returns. According to a survey conducted last year by Operations & Fulfillment, one-third of direct-commerce companies experience return rates of 2% to 4%, while another third experience return rates in excess of four percent (twenty percent have average return rates higher than 20% annually). Costs to process returns vary, but a survey conducted last year by the eCommerce & Catalog Systems Forum found an average of $12 per item across a wide range of product types. Some statistics indicate that the full cost may be closer to $31.

The point is, the cost of processing returns is a major counterweight to any cost savings implemented in the picking and packing operation. Successful efforts to reduce return rates (and, of course, to reduce the cost of handling returns) will have a major positive impact on reducing overall fulfillment costs.

One way to reduce return rates is to make sure that full and complete product information is available to customers in the call center and on the Web, which may require systems upgrades and will also require an administrative commitment to keeping the data current.

Also helpful is the inclusion of package inserts that “resell” the product when it arrives and may also provide additional instructions or suggestions about the product, much as a “lift letter” does in a book series fulfillment operation. In the heyday of the Time-Life book series, each volume included a letter from the publisher that romanced the contents of that particular shipment. It did wonders for extending the lifetime value of series customers.

The survey conducted by the eCommerce & Catalog Systems Forum revealed some other hot-button issues for managing returns. One respondent wanted better integration between “the physical process of handling returns and the logical process of customer service and WMS systems,” that is, returns processors are operating in the dark with regard to the rest of the business.

“We don’t currently have the ability to measure returns processing by individual procedures,” said another. The whole process is “way too complicated,” noted a third, and “overly cumbersome,” said another.

“The item has to be touched too many times” was another refrain. “Returns are not processed easily and reports are not available,” said one frustrated respondent. Still another complained that “The numbers are not tracked and reviewed as thoroughly as we would like” and “The whole returns software component needs revamping: It is not user-friendly and it is cumbersome.”

Systems squeeze

The sad fact is that comments like those above about processing returns could just as easily be elicited for most other aspects of fulfillment. If you do take advantage of the resources you already have by asking employees for comments and suggestions, be prepared to follow through.

Let’s say that one of the suggestions for improving picking accuracy is to highlight quantities greater than one on picking documents. Your systems staff or the systems vendor has to be able to make this happen and to work with operations to determine the most effective type of highlighting. While they’re at it, there might be other aspects of the picking documents that they should redesign. Finally, you have to monitor the results to make sure they have the desired effect.

Systems changes can be a major bottleneck. “Legacy systems were not designed for flexibility,” observes Ron Hounsell, senior VP of systems at Tom Zosel Associates in Long Grove, IL. “Work-arounds can be costly, but most users are crying for ‘more flexibility.’”

In many mid-sized and large fulfillment environments it is crucial to be able to manage fast-moving SKUs from more than one picking location. Can your system handle that? If not, it can be a major modification to implement.

Another example: Packers may tell you that one of the biggest time-wasters they face is getting additional shipping labels for multi-box orders. But making it easy to generate additional shipping labels at the packing station will require an investment not only in label printers but possibly in bar code wands and certainly in systems changes, as well.

Take charge

Getting a laundry list of “fixes” is not the whole answer. You obviously need a plan, a perspective, and appropriate methodologies for implementing change. One way to do this is to adopt a formal process much like the ISO-9001 format, which essentially requires you to document everything you do. That kind of exercise can lead to creating a set of standards that make eminent good sense for your particular infrastructure. If you consider each step in the context of all others, and justify the logic of each one and of the company as a whole, you will soon find out what makes sense and what doesn’t.

Whose job is it to evaluate all this and decide what makes sense to pursue and what doesn’t? That’s not very clear in most organizations. It is certainly worth considering appointing someone as the “cost-efficiency czar” within your organization. Very few really significant and meaningful cost savings in a direct-commerce operation are self-contained in one single department. The reason so many efforts to implement cost-efficiencies fail over the long term is that no one is mandated to take a comprehensive, interdepartmental view of the business. Such failure can also lead to communications problems that have a big adverse impact on fulfillment efficiency.

Keeping quiet

George Mollo, president of GJM Associates in Nanuet, NY, has run a number of fulfillment operations over the last 20 years, including the Disney catalog, where he was instrumental in turning a $2 million loss into a $6 million profit. His most salient method for achieving that kind of success was simply better inventory control.

“I did a presentation recently for 80 fulfillment managers,” he recalls, “and when I asked them how many received a pre-season SKU-level forecast from their company’s merchandisers, almost nobody raised their hand. When I asked how many of them got backorder replenishment reports with estimated dates of arrival, a grand total of four people put up their hands. You simply cannot run a warehouse cost-effectively if you don’t have that kind of data.”

Another trend Mollo bemoans goes beyond a failure to share forecasts: It’s the all-too-typical failure even to inform the warehouse of new items that are being added to the catalog. This communications failure falls into two categories: (a) lack of participation in planning meetings at a point when major fulfillment challenges could lead to a reconsideration to include the item at all, and (b) the absence of timely information on inventory changes after they have been finalized. In the worst-case scenario, stuff shows up one day entirely unexpected. In the typical scenario, very little advance notice is given to operations people about new items that have to be stocked, or on the anticipated demand for those items.

“The costs of keeping your operations managers in the dark and of dealing with these kinds of surprises are enormous,” says Mollo.

Mollo also counsels working closely with vendors to have them clearly mark and label the shipments they send to you. “We had a huge bump in returns one year at Disney because shoes had been mislabeled by vendors.”

It also pays to have very good QC instructions for the receiving staff, both for receipts from vendors and for processing returns.

Be supple

A final thought on a subject about which it is foolhardy to summarize and generalize: Since the workflow in a direct-commerce fulfillment environment is so dynamic and changes constantly, one of the best bangs for the buck on the systems side is to give your fulfillment managers as much flexibility as possible in generating pick batches (by number of line items, by number of orders per batch, by SKU, by method and service level of shipment, by ship-to ZIP, by country, by method of payment, by method of order entry, etc.). This will give them the opportunity to optimize for your infrastructure on a daily basis, while you plan for improvements on a longer time horizon.

Ernie Schell, President of Marketing Systems Analysis, Inc., Southampton, PA, is author of The Guide to Catalog Management Software. He can be reached at 215-396-0660 or ernie@schell.com.