By: Tenaka Budiman, Executive Board of ALI
Logistics+ vol. IX Issue No. 48
In supply chain management, activities flow from upstream to downstream, starting with the supplier's supplier and ending with the customer, usually, warehouse space is needed to process raw materials into finished goods, package the goods and then store them. The warehouse is where goods are stored though every stage of the supply chain. Moreover, the further downstream the activity, the more important the warehouse becomes, especially since finished goods are likely to be stored there and need to be kept safe from harm. As for the manufacturing process, raw materials and packaging materials enter the warehouse where they are turned into finished goods and sent to the distributor. The distributor then categorizes the finished goods and then makes them available to the wholesalers, retailers, sub agents and others who want to sell the goods though retail outlets.
In this article I will not explore the concept of physical distribution, but rather share experiences related to the importance of the warehouse, warehouse management and physical distribution.
As we know, physical distribution is mostly concerned with product deployment. Though vertical and horizontal distribution, products get closers to the market and can be more easily found by the consumer. In general, warehouses used for physical distribution though out Indonesia are relatively small and can only accommodate enough goods for two to four days of average sales. Bigger warehouses do exist but are less common and can accommodate five to ten days worth of products for sale. Managers often argue that it is more strategic to open points of sales (POS) with warehouses located closer to target markets though direct delivery from the factory to the POS rather than using distribution centers (DC) as a hub and spoke style of distribution. Unfortunately, many warehouses involved with appropriate warehouse management. Only rarely do we see warehouse involved with physical distribution implement a truly effective warehouse management system.
I would like to talk about direct delivery from the factory to the POS warehouse versus the hub and spoke system. Which is better and more efficient and under which circumstances? Many people are of the opinion the direct delivery is more efficient because there is no double handling compared to using distribution centers as hubs. This may be true, but not always. Why? Because direct delivery is only most effective if the goods delivered from the factory are strictly in accordance with the needs of the recipients of the goods. That means that the goods come as a consolidated delivery and are of a quantity of at least the upper limit of a minimum order. A problem that often occurs is sometimes the goods delivery do not exactly meet the needs of the last costumer. Sometimes the factory may be forced to delay delivery of the goods until the next week because there is no a big enough order to justify the costs and the space of delivery. From my experience, direct delivery is most appropriate for fast moving product requiring full truck loads (FTL) of full container loads (FCL) where the consignee warehouse need not devoted excessive warehouse space for additional storage or sometimes the goods can be directly sent to the next supply chain, like wholesaler, for example. Generally, the factory prefers to send FCLs or FTLs in order to achieve maximum efficiency in delivering, but this is not always to the satisfaction of the distributor. So direct deliveries from the factory to the distributor do not always gives added values for both parties, especially in cases where an order from the distributor in less than one truck load or one container load. This may mean a potential loss in sales for the distributor or even a withdrawal of the order for the next week (pulling forward to PO) depending transportation coasts.
Now, let us look at the distribution center (DC) hub and spoke system. This system may require logistics distribution centers (LDC), regional distribution centers (RDC), main distribution centers (MDC), forward stock location (FSL), an others. For distributors, DCs provide added value by aiding in the managing of goods which are slow moving and delivered in a consolidated way. Without consolidated deliveries, distributors would receive more slow moving goods than they actual need as the minimum order quantity (MOQ) would have to be satisfied. Consolidated deliveries allow various products from multiple principles (manufacturers) to be sent together, so the DC can combine deliveries of various goods together to fill FTLs or FCLs. This is especially valuable if Reorder Point System performed from DC to consignee points and the benefit are gained control of inventory at any point to be more optimal. And also the need of warehouse space in each POS is becoming less. Although though this DC system, direct delivery can be implemented for consolidated products delivery to Modern Trade or Traditional Trade Outlet.
Direct delivery from factory to distributor or factory to distribution center (hub and spoke system) can both be employed depending on the benefits each would provide at any given time. For example, if fast moving items can be sent by FTL or FCL directly to the destination point, it is more efficient than though the DC, when deciding which system to implement, a comprehensive analysis should be conducted in order to find out which will most likely provide the most added value and benefits to cost, either in storage or transport.
So, when should it become necessary to implement a warehouse management system (WMS)? I think that before implementing a WMS, a few questions need to be asked. First, how will the complexity of activities of loading and unloading, receiving, storage, and picking be conducted at the warehouse? Will the warehouse management be in charge of all the operational activities at the warehouse? Is the warehouse management be in charge of all the operational activities at the warehouse? Is the warehouse team going to run stock taking and cycle counts periodically? What if there are discrepancies in stock taking and cycle counts? Should 5S and kanban systems be implemented in the warehouse? Is the warehouses team's picking accuracy bad or good? How many total stock keeping units (SKU) can be managed? These questions should all be answered before implementing any IT system. If the operational activities of the warehouse have not been measured, then that needs to be done as soon as possible and from those measurements, so we can understand the complexity level of process. As operations evolve, larger racking systems may be required and fuller variety of product may start entering the warehouse. While the process may feel constraining, increasing productivity and enhancing the picking process eventually becomes more crucial and that is when the use of a WMS should be considered. Using a WMS usually helps the processes in the warehouse become more efficient and effective and should never be thought of as a hindrance to progress. As for the operational activities and business processes in the warehouse already defined and well measured, a well implemented WMS will help us to get an improvement in performance.
I have ever heard the testimony of many who first use a WMS and in the first 4-6 months, they have a tough time. Yes, there can be growing pains and perfomance improvement might not be immediately evident, but eventually good benefits and added value will come: stock discrepancies will reduce much better and also picking accurancy will be much better.