10. An Introduction to Distribution Resource Management

Another issue is the requirement that companies purchase in container loads for each warehouse, potentially causing an overstock situation. To avoid this problem, accumulate the sales of each item into one master file for all the monthly promotions for the entire warehouse combined. When it’s time to purchase, do so for the entire company rather than each individual warehouse. This helps in making container loads for overseas shipments because of the combined demand for all warehouses. If it becomes necessary to increase or decrease the size of the container load, the whole company will see the effects.

After the order is received, it is stored in a central warehouse and dispersed as needed to each distribution center. This is known as distribution requirements planning (DRP). Combining warehouse volume minimizes the volatility in the demand. This allows for promotions to be run with less safety stock because of decreased volatility. In Six Sigma, variation is the enemy so it’s necessary to do as much as possible to avoid it.

The center can act as a hub-and-spoke process. The nine warehouses will draw orders from the central warehouse based on their demand each month. The central warehouse is the hub and the nine warehouses are the spokes. The delivery cycle can be once a month from the central warehouse or hub rather than once every four to six months from overseas. To properly facilitate this operation, it is necessary to contact the freight forwarder or consolidator.

Using a freight forwarder provides Container Delivery Management by providing importers with information on a container’s status. This information is known as visibility: It gives you the ability to visualize the status of your freight. It is also possible to interface electronically with the customer’s forwarder to provide complete container cycle time. Lack of visibility of this information on a container’s status can lead to any of the following:

• Storage fees assessed by the carrier due to late pickup of the container

• Charges assessed by the carrier due to late return of the container

• Production disruptions or distribution shortages caused by lack of information on incoming containers, effectively creating a bottleneck in the supply chain

Track and Trace allows for 24/7 Internet connectivity on the container location. Express bookings allow for electronic booking, receipt notifications, pickup arrangements, shipment tracking, and online documentation generation.

When a company is buying foreign goods, it may become necessary to bring in a container load of goods that could be equal to a year or more of inventory. This destroys inventory turns and takes up warehouse space. After the merchandise is stored in the hub warehouse, notice can be sent to have a month’s worth of inventory shipped to each warehouse. The lead time is 7 to 10 days at the most, which is much better than the 30 to 60 days it would have taken to source from overseas. As an example, let’s say the freight forwarder charges 10% and the profit margin on overseas goods is 40% to 50%. This still leaves a 30% to 40% profit on purchases.

Bringing merchandise into the warehouse and stocking it as a container load would require the housing of six months to a year’s worth of inventory in each warehouse. The carrying cost would be too high and it may be necessary to pay outside storage fees. Let’s say that 17% of the product is from overseas and the carrying cost is 26.6%. In the first scenario, consider buying overseas without the use of a freight forwarder. In the second, use the forwarder to perform the DRP functionality.

Buying from overseas without the forwarder, the total sales are $936,824,568. This would represent $936,824,568 × .17% = $159,260,176 for a year’s worth of imported inventory. Purchasing six months of merchandise at each center, the average inventory would be $159,260,176 / 2 = $79,630,088. As discussed earlier, because the purchase is for a container load for each of the warehouses separately, this may represent six months of inventory. The $79,630,088 represents the total overall order quantity for each of the warehouses. The average inventory would be represented as 1/2 Order Quantity, which is $79,630,088 / 2 = $39,815,044. This is the average six months’ inventory stored at each DC without using the DRP concept.

The norm for the industry’s charge for storage can change for the type of product and the forwarder doing the scouring. This example uses a charge of 10% of the average yearly value of inventory for delivering and storing product at a central warehouse. It is necessary to provide the initial six months’ PO and the product is brought in as three different shipments every other month from overseas. It is possible to cancel orders if they have not been shipped. The DRP system orders merchandise six times a year. It can be booked with other shipments to make the total cost less. The total charge comes out to be 10% to 30% of the average inventory. In this example, 25% × (their charge) × $39,815,044 / 3 (two months’ average inventory) = .25 × $13,271,681 = $3,317,920 (two months’ average inventory). This average will also be the average inventory for the year. The yearly charge to the freight forwarder is $1,327,168.

Bringing a month’s worth of inventory from the hub into each of the DCs would represent $39,815,044 / 6 = $6,635,840 extra average inventory stored in other warehouses for nondomestic merchandise each month. If it was necessary to bring all this merchandise into the warehouse, the cost without the DRP system would be $39,815,044 − $6,635,840 = $33,179,203. Again, the $6,635,840 represents the one month’s extra inventory that is in each DC from the DRP program. The $33,179,203 is the average inventory for all the warehouses when not using the DRP program for the nondomestic products for the year. Let’s take a look at the Lean and Green effect of the DRP.

This is not the only savings available with the forwarder. There is also the warehouse utilization cost savings. Warehouse space is expensive. It would be necessary to reposition the merchandise into overstock, and this involves double handling. If the warehouse is close to maximum utilization, an extension to the warehouse would have to be built or other facilities rented. To bring in the entire amount of inventory to the warehouse, more storage space would be needed. The nondomestic merchandise represents $159,260,176 for a year’s worth of imported inventory. Six months of this is $66,358,406, which represents the initial shipment to all nine warehouses. On average, each warehouse would receive $66,358,406 / 9 = $7,373,156 as extra imported merchandise. The amount of increase is $66,358,406 / $173,031,187 = 38.4% in warehouse space required to house the additional inventory.

Typical warehouses employ 80 to 120 people. Using the average of 100 people in a warehouse, personnel savings is 38.4% × 100 = 38 people. The decrease in demand will not affect all employees, only the stocking and receiving personnel. This is a 38% increase in labor productivity in the distribution center. To compute the number of extra employees, multiply 100 per warehouse × 38% to see how many employees would be saved by the entire enterprise. This is equal to 342 employees not having to be hired to run in a non-DRP environment. At $18 per hour and with additional benefits of 25%, at 40 hours per week and 52 weeks per year, the direct labor savings is $46,800 per year per worker. Not needing to pay the 342 additional workers saves 342 × $46,800 per year = $16,005,600.

The total building cost savings would be 38% savings of warehouse space required × $22,260,000 = $8,458,800 × 9 = $76,129,200.

New warehousing construction cost of material and inventory is Cost Saved = $76,129,200. The savings introduced so far is totally from the company’s perspective. It does not include the added cost if the hub warehouse has to expend to store and deliver merchandise. This does not include the added warehousing space needed. It would only be fair to temper some of these savings by sharing some of the expense with the hub warehouse. The premise is that the hub warehouse will have higher productivity. If, for example, the hub warehouse is 30% more efficient at the warehousing operation, then the $76,129,200 savings would be reduced by 70%. The new Green Savings is $22,838,760. This merely says that the warehouses are cubed 30% smaller because of more efficient economies to scale in lieu of their core business. This is a real possibility.

• Table 4-8 in Chapter 4, “Transportation Management System (TMS),” shows that 3,060 kWh × $0.16 = $490 dollars were saved in less electricity usage by a reduction of one computer usage for the distribution center. There are 38 fewer people so the total reduction is $18,620.

• Computer usage and purchase of computer equipment savings is $18,620.

• Landfill Savings of 9.75% of $70,833,333 is $6,884,999 per year.

• Total Green Savings is $22,838,760 + $877,230 + $18,620 + $6,884,999 = $30,619,609.

The following is a summary of the costs and profits:

• Service-level savings in increased sales is $6,895,965.

• Increase in profit from increased sales is 30% × $6,895,965 = $2,068,789.

• The cost of the forwarder is 25% × $13,271,681 = $3,317,920.

• Total Lean Savings Gain or (Loss) is $7,060,534 + $1,327,168 + $16,005,600 + $2,068,789 − $3,317,920 = $23,144,172.

• Turns prior the DRP = 5.41.

• Inventory prior to the DRP program = $173,031,187.

• Inventory after DRP = $165,703,133 with an inventory savings of $7,060,534.

• Sales prior to DRP = $936,824,568.

• Added sales from DRP = $6,895,965.

• Sales after DRP are ($6,895,965 + $936,824,568) = $943,720,533.

• New inventory turns are $943,720,533 / $165,703,133 = 5.69 turns.

• Total Lean Savings is $26,462,092 − (the cost of the forwarder, which is $3,317,920) = $23,144,172.

The timetable is now monthly rather than every six months. The extra trips from the hub to each warehouse do not need to be addressed when the backhaul system of routing is being used. A backhaul program uses the fleet to deliver the customer merchandise and pick up the imported supplies, returning them to their respective warehouses.

Four of the warehouses do not have this capability, so they have to expense the extra transportation to and from the hub to the four warehouses. The number of trailers is calculated as $66,358,406 / $40,000 per truck = 1,659 trailers every six months. Now to compute the number of trailers delivered per warehouse from the hub, divide the 1,659 by 9 = 173 trailers per warehouse. The four warehouses that are not backhauled have roughly half the volume of the other centers.

The nonbackhauled centers then receive 1/2 × 173 = 87 trailers every six months. They are receiving these trailers every month. This does not compute to 87 / 6 = 15 trailers per month. The trailers will be picking up exceptions and new danger-level items which could increase the monthly shipment by 25%. The total cost in this process is 15 × 4 × .25 × 400 miles round-trip × 6.1 miles per gallon × $3.12 per gallon = $3,069 in added expense in fuel costs.

Green Savings is $30,281,071.

Total Lean and Green Savings is $53,425,243 for the forwarder program.