Demand Driven Distribution: The Logistical Challenges and Opportunities J. Ashayeri, R.P. Kampstra Department of Econometrics and Operations Research Tilburg University P.O. Box 90153 5000 LE Tilburg, The Netherlands Abstract Recent business and technological trends have transformed the structure and performance requirements of distribution channels in many business sectors. Higher service level expectations of retail customers, distribution outsourcing by suppliers or manufacturers presenting new problems in supply chain management. Therefore, most companies must face the complex challenge of reconfiguring their distribution chains. Few companies, however, properly and comprehensively assess the entire value chain which serves end consumers. Through undertaking a research project with three of the top exporters of flower/plant at the largest Dutch flower/plant auction in Aalsmeer, this paper addresses some of these newly emerging distribution issues in supply chain management, characterized by volatile supply and demand, and short life cycle times. Over the past years, exports of this industry have grown rapidly, while at the same time customers order sizes have decreased and these same customers demand faster delivery. These dynamics have led to the creation of complex buying, selling, sorting, truck loading and dispatching operations. To cope with these operational complexities, the distribution centers require real-time decisions making tools and operational concepts. Macroeconomic forces suggest that in general business-to-business and business-to-customers deliveries are required faster than ever, while the entire supply and demand processes are getting more uncertain. This paper outlines steps to resolve important challenges in distribution chains/ networks. A step-by-step strategic and tactical approach to study, re-design business processes, and implement Demand Driven Distribution (DDD) concept is herewith presented. In addition, related issues that are necessary to successfully operate such a system are identified. Résumé Dans beaucoup de secteurs, les évolutions récentes des entreprises et de la technologie ont transformé les exigences concernant les structures et les résultats des circuits de distribution. Les attentes élevées de la clientèle des particuliers, l externalisation de la distribution par les fournisseurs ou les fabricants, font naître de nouveaux problèmes dans la gestion de la supply chain. La plupart des entreprises sont de ce fait confrontées au défi complexe de la reconfiguration de leurs circuits de distribution. Peu d entre elles pourtant évaluent correctement et complètement toute la chaîne de valeur jusqu au consommateur final. S appuyant sur un projet de recherche impliquant trois des exportateurs les plus importants de fleurs et de plantes du plus grand marché d enchères néerlandais d Alalsmeer, ce texte traite de quelques uns des nouveaux problèmes de distribution dans la gestion de la supply chain, qui se caractérise par la volatitlité de l offre et de la demande ainsi que par un cycle de vie des produits très court. Ces dernières années, les exportations de ce secteur ont fortement augmenté, alors que dans le même temps les clients diminuaient la taille de leurs ordres et exigeaient des délais de livraison plus courts. Un tel mouvement a fait naître des opérations complexes d achat, de vente, de 1
sélection, de chargement et d expédition. Pour faire face à cette complexité, les centres de distribution doivent disposer d outils de prise de décision en temps réel et de concepts opérationnels. Les forces à l oeuvre à l échelle macroéconomique semblent indiquer que les livraisons d entreprise à entreprise et d entreprise à client se doivent d être plus rapides que jamais, alors que l ensemble des processus d offre et de demande deviennent plus incertains. Cette communication donne un aperçu des mesures à prendre pour répondre aux défis importants auxquels sont soumis les chaînes et réseaux de distribution. Une approche stratégique et tactique graduelle est ici présentée pour l étude, la redéfinition des processus commerciaux et la mise en œuvre du concept de Distribution Pilotée par la Demande (DPD). Les questions connexes à régler pour faire fonctionner avec succès un tel système sont également identifiées. 1) Introduction Distribution is a key function that adds value across the supply chain and plays a strategic role. The importance of distribution s role to the supply chain can be seen in the classical example of supply chains like Wal-Mart, FedEx, and UPS. The cornerstones of such operations are a vast array of warehousing facilities, information networks and transportation assets. Despite the success story of such examples, new trends are emerging in the market. The two most dominant being: a shift from the Buy-Hold-Sell (BHS) to the Sell-Source-Ship (S3) model of distribution; new value-adding roles; and in the continued globalization of distribution business. A shift in distribution model. The dynamic nature of markets, technological developments and demanding customers have caused distributors to adjust their way of doing business. Traditionally, distributors buy goods, hold them in warehouses until they are required, then sell them to retail level customers. This model is being challenged by a more cost effective, time-phased delivery of goods model, which reduces cost associated with inventory, and responds more quickly to customer demands. Sell-Source-Ship (S3) is displacing the Buy-Hold-Sell (BHS) model of distribution (Girard (1999)). Some examples are: e-businesses (e.g. Amazon), mail-order companies (e.g. Neckermann), parcel express services (e.g. UPS), fresh distribution (e.g. flower exporter), etc. Under the S3 model, a distributor buys to stock as little as possible or buy as they sell. And choose instead to quickly source, pick, add value, sort, and deliver products on the date promised, which is usually short. S3 is being adopted because of the drive towards e- commerce, more direct delivery programs, and multi-distributor buying groups. This new model has placed the distribution systems in highly dynamic and volatile environment due to both demand and supply uncertainties. Continued globalization of distribution business. Distribution is a large, growing part of the world economy. With the continued growth in the globalization of business, distribution is an indispensable entity of global business operations. The distribution industry has showed continual growth over the past ten years parallel to that of business globalization. This growth has not only resulted in larger volume of transactions and larger number of SKUs to be handled but also has brought new value adding dimensions into distribution center and therefore increased the distribution center operations complexities. Given the above trends, distribution centers (DCs) are facing a highly dynamic, uncertain, and complex environment. Currently, distribution centers are able to monitor and control their logistics operations through very limited planning, communications technologies, and reliance on highly trained field personnel. The monitoring and control system of yesterday, however, is inadequate to manage distribution systems tomorrow, and in some cases even today, and still meet the customers demands. As the supply chain 2
system response time decreases, the number of uncertain events will be increasingly more tangible, yet acceptable levels of flexibility must be maintained. In the coming years for any distribution system facing these changes it is uneconomical to have more employees to rely on in order to ensure maximum response. To create a more lean or agile DC, a twofold types of process intervention is necessary: a) internal intervention, b) external intervention (see Figure 1). The objective of the earlier is to optimize and synchronize internal processes in order to reduce inventory, maximize operational capabilities, and increase speed. The objective of the latter is to synchronize activities with customers and suppliers through different formats of collaboration. Physical Distribution Processes Supplier Purchase Logistics Sales Customer External Internal External Figure 1: Physical Distribution processes Most distribution centers are aware of internal and external process interventions. However, the scope is limited to process optimization. Activities are designed such that a desired balance between costs, efficiency, and quality is achieved. Typical investments for optimization are mechanization or automation that speeds up processing of products or information. What is often forgotten is the synchronization of processes. Synchronizing only the physical processes will not lead to the desired physical distribution flexibility increase. Especially when distribution faces high uncertainties in demand and supply, it is of outmost importance that sales, purchasing, and logistics activities are synchronized. Elimination of uncertainties goes one step further, for that chain collaboration with external parties is required. Demand Driven Distribution (DDD) is a vision for leveraging management decision support system and automation technology that improves the wholesalers and distributors business. The idea is to redesign the distribution system activities such that based on the customers requests and purchase information, activities within a distribution center are reorganized to reduce the lead-time needed to load trucks and balance the workload of order picking/sorting operations. Leverage is obtained through an intelligent decision support system that can capture the information generated by purchase and sales departments, process them, and make the most use of available order picking resources throughout a distribution center. Additional leverage is also obtained from automation technologies such as automated sorting system, automated mini-load or carrousel systems, and other related technologies such bar-coding, track and tracing systems. These allow support to tie together and coordinate in most efficient way, activities from point of purchase to point of shipment and to improve both quality and efficiency, and scale the business, while effectively managing costs and resources. The effective coordination and collaboration of purchasing, sales, order picking, sorting and truck loading, can be achieved through a well designed technological and management system. This system provides the infrastructure, processes, and organizational support necessary to capture, create, and deliver solutions to drive the business. An effective solution achieves the following benefits: Improved customer satisfaction. Customers receive faster, more accurate, and with better quality their needs, as the flower and plant distributors want to continuously improve in response to customer requirements and trends. 3
As is shown in Figure 4, the layers are in order of decision level: resources planning, system supervision, operational plan, and real-time response. Higher control layer has a higher level of decision-making. With it the frequency of decision-making declines. So, resources planning is done on daily basis, system supervision hourly, short-term scheduling every 15-minutes and real-time response occurs real-time. These frequencies are chosen deliberately small. Especially the scheduling control layer is executed very frequent. It is this short-term scheduling in combination with tight interaction with real-time response enables SLPC-system to handle situations under high. When the level of uncertainties reduced through external collaboration, the time window can be longer than 15 minutes for the case of cut flowers. 5) Conclusions With so much economic value put at risk by business and technology changes in the distribution channel, we conclude that distribution logistics operations synchronization with purchasing and sales represents a significant opportunity for enterprise and supply chain improvement. Business leaders are continually focused on increasing shareholder value by reducing operating costs while increasing revenues. Firms that invest in superb distribution operations can strongly influence their performance-reducing cost, increasing revenues and raising customer satisfaction (Gattorna 2003). To take advantage of the changing distribution market, distributors must adapt to the current trends occurring within the dynamic marketplace. Today the distribution facilities are fully linked to the supply chain. It serves a strategic role as a transfer point of both product and information as well as a vehicle to provide value-added services. Depending on customer needs, distribution facilities are required to fulfill various roles in the supply chain. In order to better manage DCs operations we proposed a concept that addresses the dynamic and uncertain nature of business environment of tomorrows and in some cases even today. The reported research here is on-going endower and is being now in a test phase. The ultimate goal is to integrate such a system within the current Warehouse Management Systems. Such integration allows picking, VAS, and sorting activities to be coordinated with those of purchasing and sales. This shall result in a better utilization of distribution facilities providing the capabilities to respond to the new realities elaborated in this paper. References 1. Ashayeri J., and Kampstra R.P. (2004), Logistics planning and control under uncertainties in distribution centers, Working paper, Tilburg University. 2. Bonney, M.C., Zhang, Z., Head, M.A., Tien, C.C. and Barson, R.J. (1999), Are push and pull systems really so different?, International Journal of Production Economics 59, 53-64 3. Choe, K. and Sharp, G. (1991), small parts order picking: design and operation, Georgia Tech Research Corporation http://www.isye.gatech.edu/logisticstutorial/order/article.htm 4. Girard G. (1999), The e-changing Face of Wholesale Distribution, Supply Chain Management Review, Fall, p. 19-21. 5. Gattorna J. (ed) (2003), Gower Handbook of Supply Chain Management, Aldershot, Gower Publishing. 6. Hinojosa, A. (1996), Designing distribution centers: shifting to an automated system, IIE Solutions 15
7. De Kok, A.G. (2001), Push en pull in supply chain management, Bedrijfskunde 73, 94-100 8. Koster, M.B.M., Poort, E.S. van der and Wolters, M. (1999), Efficient orderbatching methods in warehouses, International Journal of Production Research 37, 1479-1504 9. Russell, M.L. (2001), Cost and throughput modeling of manual and automated order fulfillment systems, M.Sc. Thesis, Virginia Polytechnic Institute 10. Schneible, S.R. (1983), Order Processing and shipping for distribution, Material Handling Institute 11. Simchi-Levi, D, Kaminsky, P. and Simchi-Levi, E. (2003), Designing and managing the supply chain, McGraw-Hill, New York. 16