Inventory Management

Same Day Delivery: Eating the Elephant in the Room - One Bite at a Time

By: Derek Browning

Whether we like it or not, logisticians are staring two trends in the face: the increase of e-commerce and the desire to receive online orders in our hands right now. Companies like Amazon are partnering with the United States Postal Service (USPS) for Sunday Deliveries and testing same-day delivery in major cities, while companies like FedEx and UPS already market same-day delivery capabilities.

The obvious challenge for companies that lack critical volume is that same day delivery is expensive - far more expensive than customers are willing to pay. So that leaves us logisticians scratching our heads, how do we meet customer expectations when, at this point, they seem so unrealistic?

I propose three strategies that should get us closer to the goal, but require operational commitment of our supply chain and our company culture as a whole. Inventory management, network infrastructure, and labor deployment are all critical components necessary to meet this intense customer demand.

Inventory Management Strategy

If we’re going to get inventory into consumer hands the same day they place the order, the inventory has to be 1) available and 2) less than 8 hours away. This requires us to push the boundaries of current inventory management practices, or hold lots of inventory network-wide. Holding lots of inventory as a total-system strinventory-managementategy means we need lots of money tied up in inventory; we quickly become victims of obsolescence, shrinkage, and all of the other painful consequences that Taichi Ohno warned us about. This leaves us with one option: pushing the boundaries of current inventory management practices.

I’ve seen great success from companies employing forms of 3V analysis. 3V analysis is the stratification of stock keeping units (SKU’s) based on value, velocity, and volume, and developing inventory management strategies for each. For example, a SKU that is high in value, velocity, and volume should have a premium location in your inventory system. Yet it may not need as much space or capital investment as a SKU that is lower in velocity. SKU’s that are low in volume and velocity, yet high in value, may only be stored in a single location and rely on more expensive transportation strategies than SKU’s with lower values and greater movement patterns.

This stratification exercise will enable a supply chain professional to optimize an inventory management strategy to further enable same-day delivery, while minimizing the cost of carrying inventory on SKU’s that will not allow for it.

Network Infrastructure

In today’s fast-paced, data-driven world of e-commerce, technological infrastructure is a given. We need inventory management systems that allow for pipeline visibility and real-time communication of both on-hand inventory and inventory in transit, while communicating problems proactively.

The physical bricks-and-mortar, however, is not such a given. With the use of sophisticated logistics networks that run round the clock, and strategic use of air-freight or premium parcel services, logisticians are left with a myriad of choices as to how they set up their network infrastructure.

In two recent studies I found one client able to perform next-day services in a cost-effective manner out of only one distribution center, while another needed four to supply cost-effective, two-day services to their customer-base. These infrastructure dynamics rely not only on the price and margins of the product, but also on customer demographics. If customers are heavily clustered in major cities or in certain regions, the size and locations of facilities may look significantly different. Transportation costs and capacity constraints must be considered. The always important question of which assets should be borrowed or bought also comes into play.

As we get closer to same day delivery, one of two things must occur: 1) more warehouses or 2) higher transportation costs. The key is finding the appropriate balance between the two. The closer we are to our customers, the less we spend on outbound freight. Yet, the more we spend on facilities and duplication of resources across a network. Reeling back on the number of facilities we plant will drive up transportation costs, but will save us by eliminating redundant positions, stocking locations, and equipment in our facilities, minimizing facility overhead, and even optimizing pick routes (as more orders can be batched while picking).

While modeling software can support us in figuring out where they balance point may be, software currently has limitations in the ability to model reality. So “hand-holding” will be necessary from folks that understand logistics.

Labor Deployment

Finally, once we have stratified, slotted, and stored inventory in the right number of locations, the question quickly surfaces, how do we move it quickly and efficiently? While lean practitioners argue that customers should drive the “drumbeat,” in practice we see that the release schedule is usually the drumbeat in a distribution center. Many facilities, if they have a formal release schedule, may do a single release per shift or even a single release per day. While a release schedule like that is supposed to drive pick efficiency, the mentality of allowing multiple picks from a single location to occur on a single trip will not enable us to turn orders through our facility quick enough to meet same-day expectations.

We must increase the frequency of release schedules and move to real-time dropping of orders where possible. While this is a scare concept for many warehouses, I’ve seen warehouses move to this pattern and find that a leveled flow of orders to the floor and holding pickers accountable to quicker pick cycles often results in higher productivity's. This pattern allows more visibility to problems and inefficiencies in warehouse layout or picking processes.

We may even need to re-think our picking strategies, utilize more zone picking and rely heavier on effective slotting strategies, or even investigate warehouse automation technologies (depending on product size, shape, and weight). All of these options are tactics to drive further efficiencies and eliminate costs associated with reducing lead-time of distribution.

The Reality

Stratifying and managing our SKU’s, transitioning a network to the right amount of stocking locations, and increasing the velocity of a distribution network are all major tasks that require effort and often investment. Only time will tell how many supply chains will be able to adapt to the pressures of competition and lead-time reduction.

But one thing is for certain: ignoring the elephant in the room will not make it leave.

Posted by LeanCor Supply Chain Group

blog author

LeanCor Supply Chain Group is a trusted supply chain partner that specializes in lean principles to deliver operational improvement. LeanCor’s three integrated divisions – LeanCor Training and Education, LeanCor Consulting, and LeanCor Logistics – help organizations eliminate waste, drive down costs, and build a culture of continuous improvement.

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