2-B-1 Design/modify logistics facility layouts and equipment designs to support business model, increase productivity and lower operating costs

The logistics process affects nearly all dimensions of human interaction, yet we often don't consider the role of logistics in our daily interactions until something goes wrong. Supply management professionals are recognizing the impact of the logistics of moving and storing their goods. This impact is felt in the areas of cost, flexibility, time and delivery performance. Advancing technologies have found application in the management of logistical operations and, together with the realities of globalization, are creating challenges and new opportunities that were non-existent a few years ago. In short, logistics has evolved into a strategic imperative for many supply management professionals because of the profound impact on performance and the investments made to link to the organization's customers. The ISM Glossary defines logistics as the process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.

1) Considerations for geographical location

A) Labor considerations -An important component of any logistics organization is labor because workers will ultimately determine an organization's success. It is therefore vital that employees' skills and abilities, pay scales, training programs, selection and retention procedures, and other employee related issues be considered in selecting and locating the logistics organization.

B) Transportation availability considerations- Selecting transportation carriers is important in making the facility location decision because their availability, adequacy and cost will affect the proximity of plants, warehouses and retail locations to the final consumers.

C) Governmental issues - The location of production plants, warehouses, offices and retail locations are governed by federal laws, state statutes and local zoning ordinances. Every country, state and local government has different zoning ordinances. The organization must ensure that their buildings meet those requirements.

1.0 Political-To bring in new industry, some countries, state and local governments are willing to offer tax breaks and other financial concessions in order to bring new jobs into their area. For example, Brazil in 2007 instituted a specific tax incentive and reductions for organizations within certain industries, such as textile and leather, agriculture and automotive industries. (www.internationaltaxreview.com, September 2007). Local officials may be eager to attract new industry, particularly with a declining economy. However, other areas may not be inclined to do so, as they represent constituents that do not wish to see their community grow or may not want industry in their neighborhood. (Stanley and Matthews, 2008.)

2.0 Tax considerations- In most U.S. states, an organization is at a definite advantage if it owns no property there, because such ownership means that the organization is doing business in the state and is therefore subject to various, and potentially substantial, state taxes. Therefore, it may be advantageous to use for-hire carriers and public warehousing. Many U.S. states do not assess taxes on inventory in public warehouses, creating an additional tax shelter for intransit and stored inventories. Other countries, such as India, use tax incentives regarding warehousing to entice organizations to build in their country.

D) Environmental considerations - Keeping the environment dean and healthy for the future has become one of the most important responsibilities for the supply management professional. The challenges of effectively managing an organization without harming the environment can be successfully surmounted if the right tools and practices are available. State and federal oversight agencies such as the Department of transportation, Environmental Protection Agency, and Occupational Safety and Health Administration (OSHA) all regulate matters concerning hazardous materials/ waste, recycling, clean air and compliance auditing. A source for international environmental information is the Center for International Environmental Law (CIEL). There are numerous local, regional and national environmental organizations that supply management professionals should be aware of if they are doing business in a particular country.

E) Channel proximity /modality considerations -The purpose of the channel is to provide consumers with the goods they desire, in the right combinations at minimum cost. Consumers determine channel location and structure with purchase patterns that drive the logistical service output requirements. The best channel is said to be formed when no other competing entity generates higher profits and consumer satisfaction per dollar of cost. Given a desired level of output by the consumer and competitive conditions, supply chain intermediaries will arrange their processes and functions in a way that minimizes total costs. This shifting of specific processes leads to the entry and exit of service providers in the channel.

F) Average delivery time -Average lead time is one indicator Of logistics performance. However, in many business situations, management must be able to deal with variability in lead time. Transportation delays along with supplier and production problems make lead-time variability a fact of doing business. Also, remote or global logistics facilities will increase both average delivery time and the variability in delivery time.

G) Build out versus build up - Organizations must make the decision whether to expand a facility vertically, otherwise known as build up, or horizontally, referred to as build out. The height of the building will dictate how high shelving can be assembled, which is a key consideration in warehouse design. The higher the shelve racking, the better the space utilization, so in addition to square footage (SF), it is important to consider cubic square footage (CSF).Vertical capacity requirements relate directly to the type of equipment that will be needed. See Task 2-B-1, L. for more information on warehouse equipment. (Stanley and Matthews, 2008.)

H) Two-dock versus single-dock layout -Loading dock design has entered a new era of sophistication, thanks to practices such as just-in-time inventory. Such practices require docks to accept more frequent deliveries from trucks of varying sizes. Management has traded off 90-day stocks for two-hour supply limits. Therefore, today's loading docks must be more flexible and efficient than before. A sound understanding of material handling, inventory control, safety requirements and legal statutes is required. Good dock design contributes to logistic, safety, efficiency and profitability of the business operation. Guidelines for accomplishing this include:

• Positioning the building on the site and the doors on the building to allow safe access to roads and the dock area.

• Arranging the loading dock to accommodate trucks of all sizes. The dimensions of the dock door, the dock height, and the location of the landing strip all factor into this decision.

• Assisting those responsible for material flow to get through the docks. They are best able to judge dock equipment on the basis of safety, productivity, reliability, capacity and flexibility.

• Planning the staging area inside the loading dock so material flows efficiently to and from its internal destination.

I) Safety considerations -The one area where carriers and their customers cannot compromise cost is safety. The added pressure of moving high volumes of freight more efficiently often requires compromises in the length of time between repairs and replacement of operational equipment. Supply management professionals need to be cognizant that if a carrier develops a reputation for unsafe operations, such as having too many accidents, a loss of customers will likely ensue.

J) Security -The level of required security is a key issue with managing facilities (plants, warehouses, etc.), particularly with the increase in terrorism. If the entire facility is secure, then the need for guards and gates is limited. Controlling ingress and egress, keeping parking areas away from the immediate vicinity of the building, and designing the building to be difficult to penetrate limit the cost of securing the facility. Alarm systems are useful deterrents, but not impenetrable. In most facilities, losses come from internal theft. Therefore, control of ingress and egress should be coupled with a verifiable document system, to limit this risk.

K) Sanitation -Waste disposal is another consideration. Transportation and manpower costs will vary depending on the distance to the local landfill. Supply management professionals must consider local and governmental regulations regarding substances that may be banned from dumping, such as certain chemicals, and any recycling requirements. The availability of sewage systems must also be a factor.

L) Warehouse material handling systems (for example, facility consideration regarding forklifts, pickers, etc.) forklifts -The forklift has enabled significant productivity growth for the receiving, storing, picking, staging and, loading functions of the warehouse. In fact, most products spend more time in the material handling process than in the manufacturing process. Forklifts chosen for an application must be integrated into the product flow within the warehouse or manufacturing facility.

Pallets -The most common method of supporting a unit load is with the use of a pallet. Pallets have provided a useful service since forklifts were developed, and allow for ease and efficient movement of unit loads by forklifts. They are produced in various materials, sizes and designs. The most common materials include wood, corrugated paper, plastic, steel and aluminum. Wooden pallets are available in most geographic locations and can be easily repaired Plastic pallets are being used increasingly because they can be reused almost indefinitely. Corrugated pallets can be erected as needed, thus reducing space requirements.

Pallets provide a useful function but are an added cost to a material handling system. Supply management professionals must adequately design the return process, which adds complexity to operating processes and a consideration in locating logistics facilities.

Warehouse receiving - Receiving entails scheduling appointments with carriers for specific unloading times.

Most carriers appreciate a scheduled receiving dock and are most cooperative with organizations that use appointment systems because the systems represent obligations. Running a scheduled receiving operation requires the ability to measure and predict work flows to allow the warehouse to hold to scheduling timetables. The increasing use of advance shipping notices (ASNs), an electronic manifest, facilitates the receiving process more efficiently and accurately. An ASN is defined in the ISM Glossary as a notification in electronic data interchange (EDI) or extensible markup language (XML) format sent ahead of a shipment listing its contents and shipping information. It often includes purchase order numbers, stock keeping unit (SKU) numbers, lot numbers, quantity, pallet or container number and carton number. It is usually combined with bar-coded compliance labeling for easy scanning, receipt into inventory and automated data collection. ASNs may also be paper based.

2) Order picking versus stock replenishing functions

Order picking involves the outbound flow of materials from an organization's warehouse to its customers while stock replenishment is the inbound flow of materials from suppliers to the warehouse.

Orders must be prepared, or picked and packed for delivery to a staging area. Thus, reducing order-picking time should be considered in the design of the materials handling system. Items on a picking-route list should be arranged so an efficient route is created through the stock found in the warehouse to reduce handling. Backtracking in aisles and past the same stock should be avoided to minimize time and cost. Computers are commonly used today to sequence orders into efficient pick lists.

Stock replenishing is key to ensuring that the organization maintains the optimal level of stock that is cost effective and minimizes the on-hand inventory. One replenishment method is based on independent or random demand. It is usually end-customer driven and has a high level of uncertainty. Independent demand uses a reorder point/level system for inventory management. A reorder point system sets a predetermined inventory level that triggers an order. This level provides adequate inventory to meet anticipated demand during the time it takes to receive the order. (ISM Glossary, 2006.) Another replenishment method is the dependent or predictive demand method. Dependent demand is derived from or contingent upon the demand for another component or a finished product. It is driven by the demand of the supplier or customer order. It enables more anticipation and certainty than the independent or random demand. Dependent demand uses resource planning systems such as MRP or MRPII.

3) Labor intensive versus mechanized

Materials handling is most typically a labor-intensive process because it is done either manually or semi-manually. The goal is to find the best warehouse layout, equipment and degree of automation that will optimize materials handling and thus minimize costs.

A) Automation -The ISM Glossary states an automated warehouse is a storage facility that uses one or more automation technologies, such as automated storage/retrieval systems (AS/RS), automated-guided vehicle systems (AGVS) and/ or radio-frequency identification systems (RFID).Automation includes automated palletizers, and hand-held bar-code readers. AS/RS equipment enables highly accurate, real-time management of inventories because of its capacity to keep precise records of all item counts by location in storage while ensuring security of materials. Because of their ability to densely pack inventories in often unused overhead space, AS/ RS frees up large amounts of floor space, permitting major expansions in production volume without the need for additional new space. The process of RFID is increasing in use to positively impact the management of inventory. RFID is a passive or active radio-data chip that is attached to products to allow retailers to track access and compile data as part of the supply-chain flow process. (ISM Glossary, 2006.)

B) Picker-to-part versus part-to-picker -The most traditional material-handling approaches to order picking require the picker to travel to the storage location. Without a stock location system, this involves searching as well as traveling. However, traveling is a non-value-added activity and should be minimized. The types of picker -to-part methods include pick-to-pallet, pick-to-cart, pick-to-roller, and man-aboard storage/retrieval. Part-to-picker systems include carousels, storage conveyors, and AS/RS.

4) Virtual warehouse versus real warehouse

Traditionally, organizations operated with bricks-and-mortar warehouses. All inventory would travel through the organization- owned warehouse before being shipped to an internal or external customer. With a virtual warehouse, actual buildings and real inventory still exist, but inventory for sale may not be stored in an organization's warehouse. Instead inventory is shipped directly from the supplier's warehouse. If an item is not in stock, an organization might authorize it to be shipped directly from the supplier to the customer. This is possible due to the advent of real-time information sharing through the integration of information systems between organizations. The advantages of virtual warehousing are that an organization can offer a wider variety of products to its customers without stocking them, potentially generating more revenue and the cost of maintaining large and/ or multiple warehouses is reduced.

5) Logistics performance measures, strategies and cost-savings initiatives

A) Cost-to-sales ratios -These ratios are used to evaluate organizational effectiveness. As with any measure used in practice, there are issues related to which costs, logistical functions, overhead (managerial salaries, for example), and sales (net vs. gross) should be included in the metric.

B) Logistics cost per unit versus budget- Controlling costs through predetermined standards (a benchmark) and flexible budgets is regarded as the most comprehensive type of control system available. Standard costs reflect what the costs should be if the organization is operating efficiently. Supply management professionals then devote decision-making to variances from the budget. The use of standard costs represents a direct approach to determining and assigning logistics costs. However, the use of standards may not be appropriate in scenarios involving the performance of non-repetitive tasks, and for which work-unit measurements are difficult to establish. Four basic types of budgets are used in logistics financial controllership: fixed-dollar (static), flexible, zero level and capital. In practice, most logistics budgets remain static rather than flexible. A fixed-dollar (static) budget is an estimate of functional expenses. A flexible budget accounts for seasonal and internal factors that drive activity costs beyond budgeted levels. Zero-level budgeting assigns all costs necessary to perform a range of support services for functional units and funding is developed in a zero-up manner, in which funds are justified on the basis of planned activity. Capital budgeting specifies the amount and timing of significant financial investments for logistics resources.

C) Cost of functions as a percent of sales -A productivity ratio, the cost of a function, such as logistics, compares the annual amount spent on logistics resources (workers, operational activities and overhead) to sales revenue. Although sales will vary from year to year, the ratio should remain the same or change in an expected way.

D) Inventory turns (for example, sales/inventory, cost of goods sold [COGS]/inventory) -. In many organizations, management attempts to improve profitability by emphasizing the need to improve inventory turnover. Emphasis on inventory turns requires that decision-makers also consider the needed process improvements and breakthrough improvements (such as collaborative forecasting and planning). Pushing for increased inventory turnover without consideration of the impact on total logistics costs may lead to decreased profitability.

6) Third-party logistics considerations

Third-party logistics services may be provided by a party other than the manufacturer or seller, or the party buying or receiving. The third party, not directly involved in the transaction, provides one or multiple services such as warehousing or transportation. Thus, the third party should be considered in the design or modification of an organization's logistics system as if activities were being performed in-house. The trend in warehousing is to move toward the increasing use of third-party logistics and warehousing providers. The service provided by the third-party provider is their core activity. The client organization is then able to release many fixed costs and decrease headcount. (Cavinato, Flynn and Kauffman, 2006.)

7) Scorecards

A scorecard is a performance measurement and management document that records the ratings from a performance-evaluation process. (ISM Glossary, 2006.) For an organization to improve its logistical performance using the scorecard method, it must begin by defining its vision and goals. Then,. it must determine what logistics strategies will lead to attaining the vision and goals. These strategies should be operationalized into specific performance driven activities. Performance measures should be developed for each activity. For example, inbound activities might be measured by dock utilization, pallet put a ways, number of case receipts per man hour and receipt volume (backlog).

8) Process improvement action plans

Troublesome performance (for example, costs are rising or productivity has declined) will require finding ways to improve or change the current logistics process. To take corrective action, the underperforming process should be reviewed, underlying factors determined, and an action plan developed to make improvements. Process improvements should not occur only when there are issues. Continuous process improvements should be addressed throughout the life of the partnership. Process improvements are a joint interaction and involvement between all parties.

Another process improvement method that offers a practical approach to improvements, whether at the office, logistics function or the warehouse, is the SS discipline. By assigning everything a location, time is not wasted looking for items. It is quickly obvious when something is missing from its designated location. SS advocates believe the benefits of this method come from deciding what should be kept, where it should be kept and how it should be stored. It is a concept that originated with the Japanese. The five levels are:

• Sort (Seiri) - Keep only essential items that can be stored efficiently. This makes the workplace free of clutter, which encourages productive work.

• Set in order or arrange (Seiton) - Focus on the concept of an orderly workplace and items are kept where they will be used.

• Shine (Seiso) - Keep the workplace clean and neat.

• Standardize (Seiketsu) - Standardize work practices so that individuals know what their responsibilities are.

• Sustain (Shitsuke)- Continuously improve and train.