Today�s distributors are faced with supplying an evolving marketplace that consists of smarter and more demanding customers. They are continuously presented with new challenges and frequently asked to do more with less. To achieve profitable growth, distributors must look deep within their operations to ensure that productivity, customer service and costs are optimized. There is a proven approach to meeting these goals that works every time.
Shipping thousands of orders per day, each with varying order characteristics, from an inventory with tens of thousands of SKUs, to customers each with specific order criteria � this is a common scenario in today�s distribution center. Add selling through multiple channels, covering more geography, meeting increased customer compliance rules, offering more value-added services and consistent pressure to reduce costs, and you have an even more realistic picture of what distribution managers are faced with every day. While meeting daily requirements, where is the time for devel-oping continuous improvement? Where is the time to gain the competitive edge and ensure profitable growth?
Henry Ford once said, �Nothing is particularly hard if you divide it into small jobs.� Applying the words of the person who revolutionized industry is truly the only effective means to achieving improvement in the fast-paced world of distribution. Even with that said, developing improve-ments that deliver results is no easy accomplishment; it requires clearly defined goals, an effective strategy and an ongoing measure-ment plan.
The Goals
To begin, let�s be clear that there is really only one goal and that is to increase the profitability of your org-anization. Every potential improvement must be measured against how it increases your company�s profitability before it is implemented. As Ford said, let�s start dividing this goal into smaller jobs. By definition, a distributor can increase profit by increasing sales revenue and/or decreasing the cost of goods sold. Continuing the breakdown:
Distributors can increase sales revenue such as:
� Providing revenue-generating, value-added services
� Providing a competitive edge through improved order cycle and customer delivery times
� Reducing lost sales through increased order accuracy
Often more obvious, distributors can decrease the cost of goods sold in many ways including:
� Reducing distribution labor costs
� Optimizing distribution capital equipment costs
� Reducing facilities costs
� Eliminating costs associated with order inaccuracy
� Reducing work-in-process inventory
� Minimizing customer compliance chargebacks
There are many more goals that should be added to these lists, and each needs to be broken down further based upon specific distribution operations. An important recommendation is to involve your staff in the development of goals and to ask other departments including finance, sales and marketing to contribute. Document and distribute the goals to your team, and strive for team ownership.
The Strategy
In the world of distribution, the approach for problem solving, developing improvements and even strategic decision making unfortunately often involves rules of thumb, assumptions and rough estimates. Decisions are often made based on what people have seen others do in similar situations. Though experience should never be discounted, the variables between distribution companies, even within the same industry, are often significant; a �cookie-cutter� approach typically delivers less than optimal results.
The strategy to increase profitability through distribution improvements should be driven by your specific operational data and by a comprehensive alternatives evaluation approach that eliminates guesswork. With the sheer amount of data and variety of potential solutions, this strategy can be daunting. Only through a well-developed process and the use of today�s distribution planning software tools can an effective strategy be employed to achieve optimized distribution performance.
A solid approach starts with a thorough understanding of existing business conditions and an accurate baseline of current operations. While most distribution managers understand their daily operations, they are often limited in their exposure to valuable data that can be used in developing improvements. Though history cannot predict the future, past statistical data can be utilized to develop a good baseline, and it is effective in projecting future growth. It is recommended that a minimum timeframe of one year be utilized to incorporate seasonality, trends and other business conditions. Following are examples of information that are valuable in assessing existing operations:
Order Data
� Order profile: lines, units, cartons, pallets
� Orders, lines and units by month, week and day
� Order profile by distribution center
� Order line, unit breakdown by sales channel, product family, region or other category
Velocity Data
� SKUs by velocity category
� Orders, lines and units by velocity category
� Full orders completed within velocity categories
� Seasonality data � SKU velocity category by month
Inventory Data
� Days and cost of inventory by velocity category
� Profit contribution by SKU and customer type
Performance-related Data
� Time from order receipt to ship
� Fill rate by velocity category and customer
� Accuracy by order type and customer
In addition to developing comprehensive historical data, the improvement process should include accurately modeling existing distribution operations with information such as:
� Space and storage utilization by functional area
� Material and information flow within your facility
� Direct labor staffing by functional area including OT
� Operational task descriptions
Now that you have all of this information, what do you do with it? The consulting industry is infamous in its ability to collect data, but it�s not as popular in regard to its ability to do something with it. Let�s again follow Ford�s lead, and break it into smaller jobs. The distribution center can be broken down into the following areas for optimization: inventory, processes, storage media, facility layout and technology.
Inventory � Customers today are demanding �just-in-time� delivery, resulting in smaller and more frequent orders, and this trend can be seen throughout the entire supply chain. Everyone wants to reduce inventories as long as they are able to fully meet order demand and customer service goals. Without good client and supplier communication and collaboration, forecasting demand and achieving optimal inventory levels is nearly an impossible task.
So the first initiative should be to make sure there are processes in place for client and supplier communication regarding demand planning. The next job becomes ensuring that your inventory reflects this forecast, and this is where historical statistics aid the process of optimizing inventory.
Using software tools, it is possible to capture inventory velocity down to the SKU level and match actual shipments to predictions. This information can then be utilized for improved � forecasting and merchandising purposes. Statistics can also be gathered that identify profit contribution by SKU and by client for decisions in deter-mining what products to sell, those to sell out of inventory and those to make obsolete.
Processes � Distribution processes, functions and methodologies should be based on order characteristics, which can be captured by historical statistical data and projected using this information. Best practices encompass every function within a distribution center including: receiving, inbound quality control, put-away, replenishment, order picking, outbound quality control, packing, order consolidation, sortation, manifesting and shipping.
Using the example of the drive toward smaller and more frequent orders, statistical order data and benchmarked productivity rates can help distributors make good process improvement decisions. Where discrete order picking to pallet may have previously provided optimal rates, changing order characteristics may show that batch picking will result in increased productivity and decreased labor costs.
To optimize the entire distribution operation, each specific process must be evaluated individually and must stand alone in terms of financial justification for the investment to improve. Subsequently, once specific functions are optimized, they must be integrated into a total system that meets both business and distribution goals.
Storage media � Storage media decisions are based on cubic velocity and the processes employed within the distribution center, and they have a direct effect on each other. For example, poorly applied equipment can result in inefficient picking, and ineffective picking processes can result in inflated storage equipment requirements.
Today�s software tools provide the ability to select the right storage equipment down to the SKU level, based on size, weight and order characteristics. Based on a client�s historical and projected SKUs and order volumes, these tools will select the right storage media for each SKU and provide for comparison through �what-if� analysis. For example, the distributor who is evaluating changing from discrete order picking to batch picking may want to consider the many different storage options available including bin shelving, case flow, multi-level pick mezzanines, carousels, pallet rack and others.
With today�s �rules-based� software tools, alternatives can be compared simply by turning on and off switches for the various storage media options. Outputted information is then utilized for evaluating and comparing equipment costs, facility requirements and labor. Clients can also compare characteristics within a specific storage media type such as depth, width, height, etc.  and evaluate offsetting capital (e.g., deeper shelves) and process-related (e.g., replenishment labor) costs and savings.
Facility layout � Once best practices and storage media requirements are determined, the layout of the facility becomes a puzzle to achieve optimum space utilization and reduced costs through efficient material flow. Selected storage media space requirements, which are already available in the design and planning software tool, can be utilized to develop total square footage needs. Growth estimates, including both SKU counts and order volumes, can be applied to current levels to project future facility, staffing, capital and related requirements.
Technology � The first rule of technology is to understand that it cannot fix broken processes  and should be applied to improve already good distribution operations. Don�t start with technology in your improvement project, but rather finish with it to optimize distribution performance. The already developed order, velocity, inventory and performance data will be used to assist in determining the right technology to deliver the desired results.
There is no shortage of technology-related options for today�s distribution center. Technology can be automation related, software related or a combination. Though correctly applied and utilized technology can deliver significant benefits, unfortunately the benefits are sometimes oversold. So the second rule for any technology-related improvement project is to model it in your operations prior to investment. Using your actual data, technology providers can model, both mathematically and graphically, any potential improvement. Beware of the graphic simulation that looks great but isn�t based on actual data and that is not comprehensive in accounting for all variables.
The Results
The fact is that with the tools available today, actual results from implemented improvements should meet or exceed predicted results; however, the only way to prove the return on investment is to measure the results. Measuring results accurately requires a well-developed process.
Prior to implementation, specific goals were stated, as were quantifiable results that the improvements were meant to achieve. It is these goals and results that must be measured. Some are easier to calculate than others, such as space requirements ($ per square foot), labor savings and increased profit from value-added services revenue. Others are more difficult to measure and are best captured through automated data collection devices and presented in software-generated report forms such as increased productivity rates, costs per line/unit, increased order accuracy, increased inventory accuracy (cycle counting) and increased inventory turns.
Develop the measurement plan well in advance of investment and implementation of the solution, and seek the assistance of partners with accountability. Breaking measurements down to the smallest level and measuring all critical areas of your distribution center will help ensure an optimized operation that continues to deliver results.
Dan Graville is vice president of Fortna, Inc., a design build systems integration firm for the distribution industry. For more information, contact him via e-mail at