I had the opportunity to complete a site visit of an e-commerce distribution center last week. The facility was 125,000 square feet, 15,000 active SKUs, 7,000 average orders a day and approximately 10,000 individual cartons processed on Monday and 5,000 on Friday. The difference in order and carton volumes (M to F) is pretty typical for e-commerce centric facilities. Their hockey stick weekly profile is attributed to Friday, Saturday and Sunday orders that are processed on Monday.

My initial objective was to learn more about their requirements to potentially integrate Microsoft AX 2009 to their WMS. During our conversation they continued to reference they had two WMS solutions that managed different aspects of their distribution flow. I will protect the innocent and not mention these solution providers by name, however one of the providers is a Tier-1 solution and the other solution is a Tier-2 solution at best. Their IT team was anxious to walk me through their Distribution Center. In addition, they wanted to pick my brain on why they would need to run two WMS solutions. I had to admit I was intrigued. You could tell there were two different camps (difference of opinions) between operations and IT.

When I stepped out on to the distribution floor I felt like I was walking the floors of ProMat. This distribution center had automatic case rectors, print and apply, automated literature insertion, pick to light, pick and pass conveyor to route cartons, carousels and automatic case tapers. I then asked which WMS was controlling what aspect of their material flow. It turns out that the Tier-1 solution was managing and controlling receiving, replenishment and aspects of order allocation. The Tier- 2 solution was controlling the carousels (locations), the pick to light carton flow locations, and 100% carton inspection. My head was spinning with the level of complexity and then I asked how they ended up with this material handling design and with two separate WMS solutions.

I actually knew the answer, but was courteous and I let them answer the question. They responded, “Our Material Handling Integrator” designed the facility and convinced our Director of Operations and Executives that we needed to install Carousels (Pick and Put System) with the pick to light carton flow in order to achieve our order volumes. Their IT team was pretty savvy and had run the analysis and stated “the carousel solutions could not achieve the throughput at peak.” In addition, their Director of Operations wanted to double the capacity of the facility. This particular design had four pods of three carousels each (12 total carousels). The overall design was based on a pick and pass solution that started with the carton flow zone (“A” velocity items) and then passed the carton between carousels.

I acknowledged their concerns, pointed out that the situation was “classic sub-optimization,” and that their material handling integrator probably had great intentions, but poor execution. I will give the MHI the benefit of the doubt; I don’t want to imply the MHI integrator was motivated to sell this company material handling equipment. However, the MHI vendor is in the process of trying to replace the Tier 1 WMS with the Tier 2 solution, which they sold and implemented. I will let judge who has whose best interest in mind.

Sub-optimization was created in this design because the MHI vendor was focused on the wrong goal (metric). It was apparent their design was focused on order through-put and not carton through-put. If they were focused on carton through-put they would never have recommended and installed carousels to pick “B” velocity items (12,000 SKUs). Granted, their lines per hour through-put from the carousels were in line with the industry average 300 to 325 lines per hour. However, when I asked what their average lines per order was, they indicated 5.2 lines per order (which is extremely high and impressive for an e-commerce company). Ah-ha! This was a big clue.

The chance of a carton being inducted and being completed within one zone was less than five percent of the time (per their data). Hence, a carton had to travel to two zones (55%) of the time and three zones (25%) of the time. Note: if they had a one carton pick from one zone, the carton (completed order) could be completed in less than 12 minutes (from carton induction to shipping). On the other hand, this made up less than five percent of their orders. Did I mention the MHI vendor is now trying to sell the company an “A-Frame?” This will only exasperate the problem by adding one more piece of inflexible automation and not improve carton through-put.

Had the MHI vendor been focused on carton optimization (carton process cycle time), meaning how do you process ALL cartons as fast as possible based upon the order profile and variability (standard deviation) in carton contents utilizing LEAN principles (WASTE reduction: carton conveyance, carton queuing, physical motion, replenishment and inspection), their design would have been simpler. They would have used less material handling equipment, and would have leveraged their current capital (Tier- 1 WMS). But then again, that MHI vendor does not get paid for selling flexible, agile and LEAN solutions.

LEAN principles are counter-intuitive to an MHI vendor. I am not proposing that you should not add automation to a facility. I am advocating that you standardize processes, understand the variability in your process (standard deviation), put controls and measures in place to manage the variability, and then automate. A good example is the client’s use of their automatic case erector. They had reduced the number of shipping cartons from 11 to three and had standardized their carton sizes so they could justify the capital acquisition of a case erector. However, the use of carousels to manage their order volume was the wrong choice. There is too much order variability from day to day and from hour to hour to use this type of equipment.

The sad truth is that this company is stuck with 12 carousels that are only 18 months old. A simplistic, flexible and agile picking design, like dynamic continuous pick to cart using their existing WMS core functionality, would have increased their carton through put. While pick to cart on a line per hour is slower than a carousel, lines per hour is not always the goal and leads to sub-optimization. Our metric is carton processing cycle time and pick to cart would have reduced their carton processing cycle time (reduction in queuing), the number of touches per carton (reduction in motion) and the need for inspection (reduction in quality control).

In summary, had the MHI integrator focused on the right metric (metrics drive behavior) the client’s solution would have been simpler and would have delivered better value and a long-term solution. But again, a MHI vendor’s goal is to sell their point solution - and in this case they definitely sold what they knew. The lesson then, is that when developing a facility layout and design (including material handling equipment requirements), companies should engage experienced supply chain consultants focused implementing Lean principles and eliminating waste. This will ensure the plan is strategic and based on the right data and metrics. Then, if need be, hire MHI vendors to integrate the specified equipment on your behalf.

Always in motion,

Jim Barnes

Over the last six months I have been reaching out to our retail clients to understand how the economy is affecting their overall business. Time and again, I am being told the same thing, “Our retail comp sales are in the negative double digits.” In other words, comparative retail sales from 2008 over 2007 are negative 5% to negative 20%. While most retail clients predicted and some planned (NOT ALL) for negative comp sales in 2008 (-3% to -5%), many did not plan for negative double-digit comp sales in November, as was the case for many retailers. Many clients are running into credit line issues because they are over leveraged with purchase orders (incoming merchandise), or they are constrained by store real estate contracts (new and existing) that cannot be terminated. Bottom line retail sales are down, retailers are over leveraged, and end consumers are over leveraged with credit card debt, equity lines of credit and bad mortgages. Did I mention our banking system? I will save that for another day.

What I find interesting is that that the state of economy is rather predictable! I realize that this is a bold statement. So where is my empirical evidence and statistical data to back up my statement? I don’t have a statistically proven model to offer, but if we look over the last twenty eight years, starting from 1960 to present day, the stock market (S&P 500) has tumbled during Presidential elections. (Refer to Bloomburg illustrations below).

You do not need to be an economist or have a Masters in macro economics to google “presidential election & stock market.” There is overwhelming amount of information, facts and data from the last twenty years that explicitly demonstrate that a Presidential race creates UNCERTAINTY! It is UNCERTAINTY in the eyes of consumers that has a created an economic change reaction, hence dismal retail sales. UNCERTAINTY creates fear and when there is fear people retreat and stop spending. Consumers revaluate, and prioritize what is important. So why did organizations (regardless of industry) not plan for this economic down turn in 2006 and start executing enterprise cost management strategies in 2007? The information was just a click away.

I did some quick research on the following retailers (Genesco – GCO, Collective Brands – PSS, Best Buy – BBY, Circuit City – CC, Wal-Mart – WMT, Sport Chalet - SPCHA, and Home Depot –HD). With the exception of Wal-Mart and Home Depot, the previously named retailers have lost over 50% of their value from December 3, 2006 to 2008 (closing prices as of December 3, 2008. Reference below illustration). The stock market (DOW Jones) has decreased 31% over the same time period. However between the week of December 1st, 2006 and December 1st, 2007 the DOW Jones increased by 10.75% while the retail company stocks listed below were in a negative spiral. Note the week of December 3rd, 2007 is when the DOW started in a negative trend line from 13,625 to 8,376 (as of December 3rd, 2008).

Common sense tells us the strong will survive, companies that manage cash vs. EBITA will win and those who develop two- to three-year strategic strategies based upon economic analysis (governmental monetary and fiscal policy) will come out ahead. The question is why?
I believe it is two-fold: 1) the retailers that are surviving provide value through discount prices and, in most cases, exceptional customer service, and 2) the retailers that are surviving and will continue to survive are constantly seeking efficiencies in their supply chains. They are squeezing every penny from source to consumption. I am not a Wal-Mart lover but you have to give credit where credit is due. Wal-Mart’s entire business model is focused on cost containment, cost reduction or cost postponement (Southwest Airlines falls into this category as well). I believe it is this relentless 24/7 and 365 days a year focus on COST that is the difference.

So for retailers and distribution-centric organizations that are struggling to keep costs in line with lackluster sales, I have provided a few short –term, cost-cutting opportunities.

• Evaluate all transportation contracts (implementation 4 to 8 weeks): Ocean, Rail, FTL, LTL and Parcel. Both gas and diesel prices have decreased over the last three months and are lower than January 2007 prices Are you paying for fuel surcharges, and if so, why? Reference illustration below.

• Evaluate Transportation Outsourcing (implementation 8 to 12 weeks): Unfortunately, mid-market ($75M to $500M) and some large retail organizations lack World Class Transportation groups. There is a lack of talent, technology and focus on optimization. Outsourcing to a NON-Broker transportation management firm can provide immediate best of breed technology, economy of scale on carrier lanes and contracts, and a talent pool that is focused and educated from some of the best universities in the country. You need and want transparency, but there are hidden costs with a broker. Evaluate a transportation outsourcing firm that has proven technology and talent. At a minimum, hire a transportation consultant to evaluate your transportation team.

• Metrics, Metrics and more Metrics (4 to 12 weeks): specifically for distribution labor. Are you measuring at least single variable, and preferably multi-variables, with respect to labor performance? Many organizations lack the methods, measurements and motivation to drive performance and cost reduction. More importantly, providing continuous feedback to associates as to where they stand, yields great returns. You don’t always need an elaborate Labor Management System (LMS) to improve productivity. Distribution managers typically know who performs and who does not. I have seen 10% increases in productivity, which can equate to labor reductions of 4-8%, simply by telling people what you expect and when you expect it by.

• Focus on eliminating WASTE (4 to 12 weeks): there are 5 key areas, or MUDA. I will focus on number 4 & 5 (see bullet points below). The largest labor cost in a DC is picking labor (full case, and each picking), therefore SLOTTING plans and solutions can help reduce walking distance between picks. Slotting can reduce labor picking labor from 5% to 20%. In addition, balancing work-load between areas based upon constraints significantly improves productivity. Distribution Centers need to think like manufacturers. Manufacturers use production planning (master planning) and scheduling solutions to improve the flow of raw materials, and to ultimately produce finished goods. In addition, manufacturers incorporate LEAN principles and theory of constraints (TOC) to balance material flow. Take the time to understand your constraints and balance the flow of merchandise based upon the constraints, (go read, The Goal by Eli Goldratt), apply it to your DC, and stop thinking like a distributor and more like a manufacturer.

->Mistakes that require rectification (DEFECTS)
->Production or purchasing of inventories that know no one wants (OVER PRODUCTION & INVENTORIES)
->Process steps that are not actually needed (PROCESSING)
->Movement of employees and transport of goods from one place to another without any purpose (MOTION & TRANSPORTATION)
->Groups of people standing around because upstream processes have not delivered on time (WAITING)
->Goods and services that do not meet the needs of the customer

• Break your Policy Constraints (unfortunately implementation 8 – 16 weeks): often DC labor hours, schedules and allocations are not balanced with store labor and store sales. Evaluate alternative shift schedules that improve the flow of merchandise from the DC to the back stock room of the store. I am amazed that the majority of retailers do not align their labor between the DC, store, and transportation lead times. Specialty retailers (Sporting Goods, Shoes and Apparel) experience 50% of their sales on a Friday, Saturday and Sunday. However, DC labor works Monday to Friday. Labor forecasting and scheduling should start at the cash register (POS) and work backwards to the receiving dock of the DC. We have seen retailers eliminate non-service (customer facing) tasks by role splitting and moving to dedicated stocking. This improves conversion because sales people are selling and not performing non-service tasks. In addition, your DC needs to provide store-ready merchandise for direct put-away. Our last client experienced over a $1m in labor reduction by balancing their entire supply chain (source to consumption) workforce. While they increased their DC labor, it was offset by store labor reduction. Remember - global vs. local optimization.

There are numerous opportunities for cost savings if you are focused (focus is the key to execution). In my humble opinion, the FUTURE is not bright. Using the Presidential elections as a litmus test, the two years following a new President’s inaugural speech (for the last 15 stock market cycles) have been bear markets (average length of time is 1.87 years), compared to the last two years of the President’s term which have been bull markets [1]. The illustration below show the cumulative dollar difference between the first half of the Presidential term and the second half of the Presidential term.

Final Thoughts:

Retailers need to evaluate short-term cost containment measures by focusing vigorously on waste reduction throughout the entire organization. But more importantly, investing in the future with long- term financial and growth goals, specifically in the areas of talent management, continuous education, realignment of the organizational structure from merchandising centric to supply chain centric (cross functional source to consumption), and enabling technology. In addition, focus on core competencies and outsource organizational areas that are not core competencies. I am frustrated with merchandising-centric leadership teams driving their companies into the ground because they are not focused on the right goals. If your CEO is an ex-merchant, buyer and/or entrepreneur, please surround him or her with Supply Chain Management talent that are focused on enterprise cost management.

In closing, I’d like your thoughts about who dropped the ball at Circuit City. How can a company that less than seven years ago was used as a poster child organization in the book Good to Great by Jim Collins, wind up filing bankruptcy on November 10th of this year? I am not trying to be harsh, I am just keenly interested. I have business colleagues and friends who work for Circuit City so I sincerely want to know! Did they get away from their “4-S” model: service, selection, savings and satisfaction? What can we learn from them?

Always enMotion - Jim Barnes

I am in the process of training for my personal pilot and instrument rating. Since I fly 150,000 domestic miles a year, I thought it would be a great idea to start flying myself to visit customers and prospects. What I did not realize when I embarked upon this journey, and trust me it is a journey, is how similar running a business (organization) is with flight training.
Beginner pilots, and for that matter pilots that have thousands of hours, are taught to Aviate, Navigate and Communicate in that order. To put this in business terms, pilots are taught to 1) Plan the Flight 2) Execute the Flight Plan, 3) Monitor Systems during route and 4) Mitigate risk by having a back-up plan. As a single engine pilot, you are constantly looking for “outs” or contingencies if something goes wrong.
One memorable flight drove this lesson home for me. I was flying home with my CFII (Certified Instrument rated Flight Instructor) from Duluth, MN to San Francisco. Our flight plan had us flying IFR (Instrument Flight Rating) from Duluth to Casper, Wyoming. The first hour and half was uneventful. Engine performance was in check across all measurements: Oil Pressure (PSI) Manifold Pressure (PSI), Oil Temperature (° F), engine performance (RPM), fuel burn (GPH), Exhaust Gas Temperature (° F), Cylinder Head Temperature(° F), Oxygen (O2 Level) and De-icing Level (Gallons) and most important, Fuel Tanks (Gallons). However, 200 miles and about one hour flight time from Casper, Wyoming, we were checking weather (NexRad) and we could see heavy clouds. Flying through clouds with outside air temperature above (32 °F) is not critical, but flying through clouds at or below (32 °F) is dangerous due to icing conditions. Ice build-up on any aircraft wing is serious business. I had turned on de-icing 30-minutes prior to hitting the clouds. However, it was at night and we could not be 100% sure that the de-icing was bleeding over the wings. We were flying at night, the de-icing fluid is clear and we had no flash light!
At that point in time we were looking for contingencies: do we climb and gain altitude for warmer outside air temperature, do we divert to the south where there were fewer clouds, or do we stay on course and hope the de-icing is working? The de-icing gauge was sporadic and we could not determine if it was actually working. We knew that when we left from Duluth we had 1.5 hours of de-icing fluid, however we could not validate that it was working in flight!!!
You could say that the stakes were high as we executed our flight plan. My thought is that running any business (regardless of type) and flight training are identical. However, I am amazed that many organizations lack fundamental planning and the discipline of execution. More importantly, they lack contingency planning. After giving a final presentation to one of our large automotive retailers, the CEO stated that, “This is the first time we have ever developed a three- to five-year supply chain strategy.” Note: this is a $4B dollar company that had never before developed a “flight plan” that looked out beyond a year. I was dumbfounded by his comment and wondered how a $4B company could run without a strategic plan - to know where they were and where they are going.
Call me old school and I know DMIAC is the buzz but I am an advocate of Edward Deming and his model for continuous improvement: 1) Plan, 2) Do 3) Check and 4) Act. The model is often referred to as the “Demining Wheel.” At enVista we consult our clients on the “Deming Wheel” and we believe this basic four-step process is the core to continuous improvement. In addition we use Deming’s principles to run our organization. We start with a one-year plan broken down into quarterly objectives, and augment that with a two- to three-year plan that is focused on market trends and the health of the economy.
If you compare Deming’s Wheel to flight training there are great similarities and lessons that can be learned:
1. You must Plan and know where you are going. Does your company have a clear “site picture” that has been communicated from the top down? In flying I know that I am leaving from KSQL to KRAL (origin and destination airport… the Where). I know the time of departure and arrival (When and How long). The type of plane that I am flying (Cirrus N414CP SR22…. Who). I know my true airspeed and elevation (175 KTS at 11,500 feet). I know how many hours of fuel that is on board, weather patterns and nearest airports along my route (contingency planning).
2. You must now go execute the flight plan or as Deming states “Do something.” Take action with your intent. Accountable organizations take action based upon their intent. You measure yourself based upon your intent, but others measure you based upon your actions. I have seen a lot of great plans never get off the ground because no one executed them. It pains me to see a client spend six figures on a Supply Chain Network design and then have it sit on a shelf (credenza-ware). Don’t laugh; it happens all the time.
3. You must measure and Check how you are doing against your plan. As stated above, an airplane has numerous instruments and systems that you are scanning and measuring to ensure the plane is behaving as planned and that you are on the right flight heading. If your bearing is off, then you correct your course due to wind or obstacles (mountains). If your altitude is off, then you adjust to ensure that you are flying at the correct altitude. If your cylinder head temperature is high, then you lean the engine accordingly. The point is that your organization MUST have measurements and instruments in place to ensure that you are on plan. Many companies that are supply chain centric do not have basic measurements in place to monitor customer service, financials, employee performance and operational performance. It is the old adage “you cannot improve what you don’t measure.”
4. You must ACT if you are not on course. Action may be required based upon how you are executing your plan, and how you are performing according to your metrics and monitoring system. Many times this starts with getting “the wrong people” off the bus. I know this is easier said than done, but truly what makes a company successful is their people (human capital). You may have the best plan, you start to execute, you have monitoring systems in place and you fail because you have the wrong people on the team. I recently watched an organization shake up their Executive Management Team because there was not alignment at the top. This team had a plan, they were executing as designed, there were controls in place, but the team was dysfunctional because certain individuals were playing politics (organizational politics is defined as manipulating others for your own personal gain). There is no room for politics in an organization and I congratulate this organization for making the tough decision to remove non-performing Executives.

You may be asking yourself what my instructor and I decided to do regarding our flight plan. Did we change course, climb to higher altitude or stay on course? We actually stayed on course and made it safely to Casper, WY. One way to tell if you have ice on your wings at night, and assuming that you cannot see it, is by monitoring true airspeed. If a plane’s KTS starts to drop then you know you have ice on the wings and it time to make a serious change. We were fortunate that the de-icing worked as designed and that we turned it on 30 minutes prior to entering the clouds. Thank goodness we started our contingency planning early enough to make a difference in the outcome of our flight.
In summary, whether flying an airplane, participating in flight training or running an organization, the basic fundamentals of planning, doing, checking and acting are sound. Perhaps if more CEOs flew planes, there would be more well-run organizations. In both situations, it’s easy to status quo for granted, but the stakes are too high.

Always in Motion,
Jim Barnes

On Tuesday, October 8th, I had the opportunity to attend and speak at the Parcel Shippers Forum in Chicago. I spoke on "Conquering the Big Supply Chain Picture." However, what I think is more relavant is what is happening with DHL. Here is what I know and I hope it helps you.

DHL’s Recent Activities in the US Market:

In response to shareholder pressure DHL has been forced to drastically restructure their approach to the Intra-US market. While DHL has continued to maintain their strong presence in international markets (particularly in Intra-Europe) moves, they have been hemorrhaging cash in the US market since their acquisition of Airborne Express. Shareholder sentiment has finally reached a critical point, and DHL is responding.

Some of the changes DHL is planning/making include:

* Outsourcing the majority of the airlift function to UPS. Negotiations of have been kept very much under wraps to this point, so the exact details of how this arrangement would work remain unclear. However, due to the way the DHL packages would be handled in the hubs, UPS would have a distinct though unintentional advantage in regards to delivery times.

* Pulling some “scores” of feeder flights

* Canceling partnerships with its two airline subcontractors, ABX and ASTAR

* Closing 60 or more terminals (most have been closed at this point)

* Outsourcing final delivery to zip codes serviced by the closing terminals to the USPS.

* Laying off 1,500 to 1,800 employees (in addition to the 600 laid off earlier in the summer).

* DHL Investor Relations recently indicated that 45% of DHL’s US sales force has been laid off. Industry rumors put the number at 80% to 90%. While these rumors are unsubstantiated at this time, I discussed this issue with a Wall Street analyst of a very reputable brokerage house at the Parcel Forum yesterday and he is hearing the same 80% to 90% I have heard.

* Moreover, in a Morgan Stanley research report dated 10/01/08 William Greene stated that, in regards to the UPS/DHL partnership “. . . we're becoming increasingly doubtful whether this contract will happen at all. DHL's US customers appear to be leaving at a rapid pace, and congressional anti-trust and labor concerns could stop the deal altogether.” If this deal does not go through in some form or another, DHL will be left with essentially no airlift capacity in the domestic US.

Some other issues of note include:

* DHL has declined to bid on the past five parcel RFQs enVista has issued.

* There are rumors (again, unsubstantiated) that DHL has contacted a number of their largest, least profitable shippers to exercise out-clauses contained in the pricing agreements. If these rumors prove accurate, it means DHL has come to the point where they are walking away from high volume shippers and lessening their overall commitment to the US market.

Special thanks to Joe Wilkinson (enVista Transportation Practice Manager) for pulling some facts for me. It will be intereting to see how UPS and FedEx pick up the additional package volume as a result of DHL's US domestic crash.

Always enMOTION,

Jim Barnes