CHAPTER 1 - Profex · Web viewCIPS Level 5 QUICK START GUIDE Storage and Distribution First edition for new syllabus July 2006 Published by Profex Publishing Limited 7 North Road

CIPSLevel 5

QUICK START GUIDE

Storageand

Distribution

First edition for new syllabus July 2006

Published byProfex Publishing Limited

7 North RoadMaidenhead

Berkshire SL6 1PE

www.profex.co.uk

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording or otherwise, without the prior permission of Profex Publishing Limited.

© Profex Publishing Limited, 2006

ii

CHAPTER 1

The Objectives and Scope of Stores and Distribution1 The objectives of storage and distributionThe focus for organisations is increasingly on ‘delighting the customer’. Physical storage and distribution have crucial roles to play in helping to deliver this objective. The essential objectives of storage and distribution are stated by CIPS to be ‘the supply and delivery of the right goods, to the right place at the right time, in accordance with customer requirements and within an acceptable cost framework for the supplier.’

Storage should be planned, organised and operated in such a way that the timeframe over which stock is held should be as short as possible consistent with operational requirements. The costs involved in holding stock should be minimised.

Distribution is ‘the efficient movement of finished product from the end of the production line to the consumer, and in some cases includes the movement of raw materials from the source of supply to the beginning of the production line. These activities include freight transportation, warehousing, materials handling, packaging, inventory control, plant and warehouse site selection, order processing, marketing, forecasting and customer service’.

Storage and distribution forms an integral consituent of an organisation’s logistics strategy. Logistics involves the movement of goods from source through to customer. This will normally involve raw materials, semi-manufactured goods, components and finished goods being controlled and managed by a number of different suppliers.

2 The role of stores and distributionThere has been an increase in the awareness of the role of storage and distribution in delivering customer service. Particularly in the later stages following manufacture the ability to deliver on time, to specific locations and in specific quantities provides a sound level of customer service. Add to this home deliveries, late customisation and returns, as examples, then the wider perspective of storage and distribution can expand to encompass the ‘value-added’ role many organisations are seeking.

MRP provides a practical and ‘real-world’ application for many organisations in ‘minimising stock commensurate with business objectives’. With advances in IT it is far more practical and relevant to small and medium-

1

Storage and Distribution

sized businesses than has previously been the case. The implications for the role of storage and distribution is to manage the components or goods being delivered in such a way as to operate on minimum stock levels commensurate with meeting production schedules.

2

Just in time systems provide the best current application of stock control systems but rely heavily on management commitment and technology to make the operation work. Stock is delivered ‘just in time’ for manufacture. Another term often applied is ‘warehouseless trading’. JIT can be achieved by developing a very close and ongoing relationship with suppliers, supported by the linking of relevant IT systems enabling suppliers to see the customers’ production schedules and rate of manufacture and tailor their production accordingly.

The role of storage and distribution has advanced rapidly, particularly in the UK supermarket sector. In many ways the big supermarkets can be viewed as warehouses as this is partly their function. The main difference is that they sell in small quantities to the general public. Their use of EPOS (electronic point of sale) technology to manage stock levels and reordering, application of barcode technology and moves to RFID (radio frequency identification) are all examples of good practice in warehouse management.

The internet has fuelled a boom in home delivery. The home delivery market gives distribution, in particular, a number of issues that must be addressed. These include timed deliveries, response when the home is empty, and returns.

3 Network relationshipsThe supply chain as understood by logistics and purchasing is often refered to in operations as the supply network. The ‘network’ in this context refers to the various tiers of suppliers who feed into the organisation and the tiers of middlemen or distributors who act as the interface between the organisation and its customers. The design of the demand/supply network is led by the strategic objectives of the organisation.

The supply chain comprises the various links that are formed together into an integrated network with the objective of providing customer satisfaction while minimising waste and operating in an efficient and effective manner. The supply chain approach requires a new way of thinking in organisations that moves away from separate departments and functions to a more cross-functional approach. A major benefit of the supply chain approach is that it helps by highlighting the areas of activity that can benefit from a closer integrated approach with business partners.

By changing to a logistics and supply chain management style, many organisations have experienced the following advantages.

• Improvement in customer service.• Being better able to improve market share, to respond in existing

markets and to attack new markets.• Suppliers becoming an integral part of the organisation, delivering on

time, delivering quality and reducing inventory and associated costs.

3


4 Connections with the supply chainOne of the most important reasons why the adoption of an integrated approach to logistics and distribution management has proved so difficult is the lack of accurate cost information. With modern computer technology and greater integrating of inter-organisational systems it is now practical to establish logistic and distribution costs.

4

Chapter 1 The Objectives and Scope of Stores and Distribution

The ability to identify the true costs of logistics (including storage and distribution) in delivering customer service is crucial. Without it, organisations are unable to identify the potential for cost trade-offs that may exist within the system. The concept of the cost trade-off is central to logistic management. A trade-off occurs where an increase in one area is more than matched by a cost reduction in other areas. This will lead to an improvement in the overall situation.

The total distribution cost concept recognises that distribution costs extend beyond transport and warehouse costs. Here are some examples.

• A decision to increase customer service by holding additional stock will affect inventory cost, with an increase in capital tied up, and will also require additional transport and storage costs.

• Decisions regarding service levels affect the amount of inventory that must be held.

The trade-off concept has proved difficult to implement in practice. To work effectively, organisations need to look outside rigid organisational structures with fixed budget considerations and look at what is best for the organisation overall and not for individual departments. This they find culturally hard to do.

The total distribution cost concept in the form of an equation may be expressed as follows.

TDC = TC + FC + CC + IC + MHC + PC + MC

TDC = Total distribution costTC = Transport costsFC = Facilities costs (depots, warehouses)CC = Communication costs (order processing, invoicing, etc)IC = Inventory costMHC = Materials handling costsPC = Packing costsMC = Management costs

The supply chain management philosophy has established itself as an important business driver over the past decade. Individual components (planning, purchasing, manufacturing and logistics) have more developed roots. The challenge for business is to successfully integrate these functions into the supply chain approach. The supply chain becomes a mix of different operational strategies that optimise individual business processes. The total logistics concept is built on trade-offs. It is not enough to apply TLC thinking without a rigorous evaluation of how decisions impact on other areas of the organisation’s business.

The organisational structure of many organisations is undergoing a fundamental shift. The traditional management structure is based on functional divisions. The weakness of this traditional structure is becoming

5


ever more apparent in today’s fast moving business environment. Nowadays there is more emphasis on cross-functional teamwork.

6

CHAPTER 2

Customer Service and Added Value 1 Customer service in stores and distribution

environmentsStorage and distribution, either as standalone functions within an organisation or within a logistics framework, are major contributors to the delivery of customer service. The purpose of logistics could be said to provide ‘availability’, ie the right product in the right place at the right time. If ‘at the least cost’ is added then this is the objective of logistics management, but the concept of customer service goes further: it encompasses all the points of contact between the customer and supplier in terms of physical fulfilment of orders.

There is a need to balance the level of customer service provided. Marketing has traditionally aimed at ‘satisfying customer needs and wants’ with a customer service policy that met this criterion. Marketing now looks toward ‘delighting customers’ with an increasing emphasis on customer service issues. As quoted by Rushton, Oxley and Croucher in Logistics and Distribution Management: ‘The downfall of many a service offering is often the unrealistic and unrecognised high cost of providing a service that may, in the event, be greater than is required by the customer’.

Storage and distribution do not just provide the customer with the right goods, delivered to the right location, at the right time and in accordance with the customer’s expressed demands. They also organise the system in such a way that customers can communicate, be updated and change details in a flexible and efficient manner. Logistics pulls all the component parts involved in delivering customer service together by being involved from inception through to final delivery.

2 Measures of customer serviceMartin Christopher (1994) argued that it takes five times more effort, time and money to attract a new customer than it does to keep an existing customer. Research showed that retained customers are more profitable than new customers. Retention of customers is the focus for the modern concept of ‘relationship’ marketing.

This change in marketing emphasis, and an increasingly astute and demanding customer base, have led to an increase in the importance of customer service to organisations. The role of storage and distribution in

4

Chapter 2 Customer Service and Added Value

delivering effective customer service is paramount but it only forms one link (or two) in a chain.

Martin Christopher detailed a four-stage approach to developing a customer service strategy.

• Identify a service mission.• Set customer service objectives.• Recognise that not all customers require the same level of service.• Develop an effective service package that meets the identified needs.

3 Trade-offs between service levels and costsProvision of improved customer service will normally result in additional costs to the company. In essence, the higher the service level, the higher the cost. For this reason it is necessary to understand customers and their ongoing requirements for customer service, to ensure that customer service packages are best suited to achieve customer satisfaction. It is equally important that management realises the cost implications of a service strategy. Particular targets on cost and service should be set depending on the defined needs of the business.

Some organisations will adopt a cost-minimisation approach to customer service where objectives are specified to be met at minimum cost, while others will adopt a service maximisation approach, typically by specifying a distribution/logistics budget and delivering the highest level of customer service within this constraint. The applicable approach will depend on product, business or market considerations.

Rushton, Oxley and Croucher give an example of the measurement of order fulfilment.

• The number of orders completely satisfied, say 18 out of 20 (ie 90 per cent), over a given period.

• The number of lines delivered from a single order, say 75 out of the 80 line items requested (94 per cent).

• The number of line items or cases delivered from a single order, say 75 out of the 80 line items requested, but only 1,400 of the 1,800 total line items (78 per cent).

• The value of the order completed, say £750 of the £900 order (83 per cent).

Using the above example, perfect order fulfilment can be measured as:

× 100%

5

4 Adding value in stores and distributionProfessor Michael Porter describes how a company can put generic strategies (cost leadership, differentiation and focus) into practice. He addresses key questions such as the following.

• How does a company gain a sustainable cost advantage?• How can it differentiate itself from competitors?• How can it choose a market segment so that competitive advantage

grows out of a focus-based strategy?• When and how can it gain competitive advantage from competing

with a co-ordinated strategy in related industries?• How is uncertainty introduced into the pursuit of competitive

advantage?

6

Chapter 2 Customer Service and Added Value

In order to defend its competitive position or to allow it to develop in the future, Porter asserts that competitive advantage comes from the value a company creates for its buyers. This ‘value’ may, for instance, range from selling an equivalent product at lower prices while maintaining viable profit margins to providing value-added services that attract a premium price.

The value chain concept may be used to identify and understand the specific sources of competitive advantage. The concept recognises how the logistics function integrates into the business function as can be seen by the inclusion of both inbound logistics and outbound logistics within the primary activities of the organisation.

The value chain introduces a tool that ‘disaggregates a firm into its strategically relevant activities in order to understand the behaviour and costs and the existing and potential sources of differentiation’. Porter cites service as a primary activity of the value chain and suggests that the principal value of service is that it may enhance or maintain product value through activities such as installation, repair, training, and parts supply and product adjustment.

Storage and distribution can add value in ways such as reducing the time for getting a product from the production line to the customer, packaging the product to suit customer requirements etc.

5 Meeting customer demandsMeeting customer demands is the principal objective of distribution operations, but this goes beyond simply the delivery of goods since other factors also have an impact on customers’ perception of customer service. Systems and procedures that support the delivery should be flexible and enable the delivery to meet the customers’ needs.

Demand management is the term most frequently used to describe the link between manufacturing and the marketplace. It is a communications channel through which customers express their demands and the manufacturing operation ‘guarantees’ what it can commit to. Demand management encompasses forecasting, order scheduling and physical distribution and is increasingly in the spotlight as it focuses on the integrity of manufacturing’s ability to fulfil its commitments to the customer.

Customer service is a team game, which does not respect artificial boundaries. If the team plays well and everyone in the team does their job, excellent service results. But if one member of the team fails to do his or her job, poor service is provided and custom is lost. In this context note that the word ‘team’ refers to anyone who has the ability to affect the customer service perception – within the organisation, within a supplier’s company or, indeed, within the customer’s business.

7

CHAPTER 3

Distribution Planning 1 Strategic factors affecting the choice of a storage

and distribution networkStrategy has been defined as ‘… the direction and scope of an organisation over the long term; ideally, [this] matches its resources to its changing environment, and in particular its markets, customers and clients so as to meet stakeholder expectations.’

Strategy requires the matching of resources to requirements. Storage and distribution require long-term planning to be fully effective; as part of an integrated logistics organisation the entire logistics design should be viewed long-term. As with developing supply chain thinking and closer business relationships, there is therefore a strong emphasis on taking the longer view.

The role of logistics is vital in implementing both integration and differentiation strategies, which are often required to produce competitive advantage. Only by linking all logistics activities directly to the organisation’s strategic plan can logistics managers work effectively to support their organisation’s strategy for achieving competitive advantage. Organisations that focus on customer service understand the strategic significance of logistics in this process.

The adoption of a logistics strategy will often mean the appointment of a logistics director at board level. The role is effectively to centralise national and international logistics activities. The advantages include economies of scale in purchasing with savings and improvements in the movement and management of goods, but a global logistics perspective must take care not to detract from the customer service requirements of local or national markets. The role of storage and distribution is often crucial in maintaining and improving local or national customer service.

2 Major methods of storageFor most companies the warehouse, as a building and location, represents an important and costly asset. The warehouse or distribution centre plays a key role in an organisation’s logistic strategy. It is usually the point at which the organisation fails or succeeds in fulfilling the sales or marketing promise.

The modern decision where to site a warehouse or a ‘hub and spoke’ operation is a decision made in an environment of increasing fuel prices, the proliferation of factory gate pricing and the legislative requirements

7


with regard to drivers hours (the Working Time Directive). The location of a storage and distribution centre of any size has a huge impact on cost, time, fuel consumption and routeing.

Warehouses are more than storage facilities and will offer a range of additional services: receiving, storing, order picking and despatch, for example.

8

The type of warehouse will depend partly on the extent and nature of the business as well as the finance available. Initial considerations will include analysis of the need for a warehouse. Could suppliers carry stocks? Would it be economic to outsource warehousing requirements to a third party? Is it possible to meet requirements with temporary warehouses? All warehousing systems are a compromise between efficient use of warehouse space and ready access to the goods.

3 Distribution planningA fundamental consideration for companies is how they get the product to the customer: whether they should transfer the goods directly to the customer or whether an intermediary should be used. A range of factors requires consideration by a company in its distribution planning process as follows: the number and type of customers, the need to enhance sales, the need for cost-effectiveness, the need to meet customer service levels, the need for prompt and accurate feedback.

Based on these criteria, the manufacturer can choose between distributing direct to customers, or via intermediaries such as wholesalers and retailers.

4 Third party contractorsOne of the most common decisions facing the distribution planner is whether to use the organisation’s own resources to operate an in-house distribution operation or whether to use a third party distribution service provider. Many manufacturers regard distribution as a support function rather than a core activity.

Outsourcing has significant advantages: it frees up resources of capital and management time, it gives access to logistics specialists, and it gives greater flexibility when times are hard. Even so, manufacturers may worry that the third party provider will not give the required level of service, or equally may worry about the general principle of surrendering control.

Owning and operating transport is expensive. Increasingly, companies are examining whether they should have their own transport. Cost can be a main driver for change but other areas also need to be considered and evaluated.

• Control• Customer service• Flexibility• Management skills• Recruitment and training• Return on investment

9


The term ‘third party logistics providers’ (3PLs) has evolved to cover organisations offering a complete logistics service. Some 3PLs concentrate on business sectors such as pharmaceuticals, hi-tech, automotive and electronics. Another potential growth area is that of fourth party logistics providers (4PLs), who operate as the lead logistics provider (LLP) with a role to organise the entire logistics provision for a given organisation using a number of providers.

10

CHAPTER 4

Transport Modes 1 Sea freightThe most notable development in the sea freight industry in recent years has been the advent of containerisation. Containerisation offers both benefits and disadvantages when compared with the more traditional between-deck/break-bulk stowage used in conventional vessels.

The advantages of containerisation include: the introduction of door-to-door movements; increased security due to containment; reduced handling; improved transit and turnaround times; cost savings from areas such as packing and better space usage; improved service quality.

The disadvantages of containerisation include: huge initial investment in vessels, ports and facilities; costs of investing in, maintaining, tracking and storing containers; not all cargoes are suitable for containerisation.

The majority of freight to destinations outside Europe moves by sea. Sea freight is often cost-effective when compared with other transport modes when the cargo is travelling over longer distances.

2 Air freightThis transport mode is used primarily for low-weight, low-volume, high-value goods where speed is a main consideration. Freight rates can be reduced by using the services offered by freight forwarders but often remain uncompetitive when compared with sea, road or rail.

Air-freight cargo is handled using integrated IT systems from booking through to delivery to the forwarder/airline and on through to the customer. ‘Track and trace’ systems allow both airlines and exporters to find out the location of cargo at any time. Proof of delivery now forms an integral part of the tracing network, allowing shippers to get real-time information on their consignments and delivery confirmation, if required.

3 Road freightAdvantages offered by road transport are that goods can be carried on the same unit from door to door with industrial or warehouse facilities usually easily accessible by road.

Road freight is the most important transport mode within the UK and Europe, carrying approximately 80 per cent of all freight. Over 90 per cent of European goods with journeys of less than 100 km travel by road. Road

9


haulage is the principal mode of transit for intra-European traffic while sea freight dominates on an international scale.

10

Ro-ro (roll-on, roll-off) is a method of transport where the tractor and trailer drive onto the ferry and drive off again at destination. The goods remain loaded on the vehicle throughout the crossing. The routes offer a great deal of flexibility in terms of destination with schedules published and known in advance. As the vast majority of cargo remains on the originating trailer delivery can be made door to door.

4 Rail freightEurope is served by a constantly improving rail system, offering a range of services up to and including door-to-door transit. Particularly in Europe and the USA, services are well geared to freight traffic and can offer a high level of service at competitive prices.

The rail-freight infrastructure within the UK has suffered from lack of investment, but developments following the opening of the Channel Tunnel could make rail a more attractive option in the future.

Rail cargo often consists of commodities or semi-manufactures and is carried in conventional wagons, special purpose wagons or swap-bodies. A recent growth area is the development of intermodal transport particularly involving transfer of containers from rail to road and vice versa.

5 Other types of freightOften not considered by UK shippers, canals can offer a cheap and reliable form of transport. They have long been used for moving regular, low-cost commodities such as aggregates and fertilisers. Investment is being put in to the north of London and in the Grand Union Canal network to make canal traffic more attractive to industrial and commercial users.

Canals can offer price advantages over road and rail but at a slower, predictable pace of delivery. Canals can also build on environmental benefits including reduced congestion, less pollution and a positive care of the environment.

Within Europe it is possible to ship by canal from North Sea ports to the heart of eastern Europe by a combination of canal and river.

A big growth area over recent years has been the development of express operators, often referred to as couriers or integrators (eg DHL, UPS). Offering competitive rates, timed deliveries and computerised tracking, together with a high level of customer service, express/courier companies are now widely used in international trade.

6 Selection criteria for transport modesIn planning the physical distribution function the logistics manager must achieve an effective balance between the four main factors which influence the nature of a transport service.

11


• Speed • Availability • Reliability • Cost

12

Chapter 4 Transport Modes

Other factors that may influence decisions on selecting a transport mode could include the following.

• Legal restrictions that may affect the availability of drivers or restrict delivery times in certain circumstances (some cities do not allow commercial deliveries at weekends or restrict vehicles on the basis of number plates).

• Flexibility to ensure delivery criteria are met. • Packaging and documentary requirements may mean that the time

taken to comply with specific regulations may cause an alternative to be chosen.

7 Unitisation and containerisation of loadsA unit load is an assembly of individual items or packages, usually similar in type, that enables convenient movement of goods. Pallets that enable movement by forklift are the most common. ISO containers also represent unit loads. They may contain palletised or individual freight inside but they move as one integral unit.

Packaging is an important consideration when developing unit load strategies. As part of the supply chain, packaging should be kept to a minimum commensurate with the intended purpose of facilitating delivery in the condition the goods left the warehouse.

8 Intermodal transportCombinations of transport modes (also known as ‘intermodal transport’ or ‘multimodal transport’) are now considered integral parts of the movement of goods. As an example, a shipment by container from London to Nairobi might travel by road to ICD, by rail to the port, by sea to Mombasa, by rail to Nairobi, and by road to customer’s premises. Specialist companies and shipping lines have taken the lead in developing these combined operations. The logistics manager needs to consider not only the four major factors but also alternative routings, security implications and handling facilities.

The growth in intermodal transport has occurred alongside the acceptance of containers. Documentation has been revised to meet the requirements of combined transport. The main document is a place-to-place bill of lading known as a combined transport bill of lading.

9 Logistics and the environmentThe area of ‘green logistics’ is one that is of growing importance and one about which both shippers and carriers are becoming more concerned.

13


• For shippers the concern is that goods should be carried in environmentally efficient transport modes that limit environmental damage as much as possible.

• The carriers look to minimise fuel usage by use of efficient vessels, aircraft or vehicles both to reduce cost and as a marketing tool to both shippers and the public.

14

CHAPTER 5

Transport Routing and Load Planning1 Fleet managementThe fleet manager’s role, in addition to attaining objectives passed from senior management, is the efficient and effective operation of the vehicle fleet. As most distribution operations are reliant on vehicle deliveries, particularly within Europe and the UK, this becomes the hub of the organisation’s physical delivery requirement (whether outsourced or handled in-house).

The fleet manager has the following objectives.

• To achieve maximum utilisation of vehicles operating.• To optimise loads being carried, with all containers fully loaded on

both the outward and inward leg of the journey.• To schedule maintenance around key operations.• To use appropriate route planning methods.

The fleet management role involves a number of specific administrative, planning and monitoring functions.

• Planning for disposal and replacement of vehicles and equipment• Planning and scheduling maintenance and annual testing• Planning for and monitoring key operational areas such as drivers’

hours• Budgeting and costing fleet operations• Statutory record-keeping and administration• Setting and monitoring key performance indicators

Financing of new vehicles should be considered carefully. Outright purchase is straightforward, if capital is available. Leasing and hire purchase schemes avoid large capital outlay. Contract hire is also an option.

Other important considerations for the fleet manager include maintenance and security of vehicles. Fleet costs and performance must also be constantly monitored. All of this must be managed within a framework of detailed legal and regulatory rules, nowadays including the obligatory use of digital tachographs.

12

Chapter 5 Transport Routing and Road Planning

2 Vehicle routingVehicle routing and load planning will vary considerably from company to company. Channels of distribution (delivery to retailers, warehouses, factories, etc), vehicle suitability, congestion (and congestion charging), loading and unloading facilities and a host of related factors make routing and planning individual to particular organisations. However, there are common considerations that apply across the board.

A wide range of factors must be taken into account when planning delivery tactics and operations. These will involve the collection and collation of data together with information relevant to tactical and operational aspects.

Demand data is particularly relevant as it can represent the main measure of vehicle capacity. It will include such variables as:

• weight (per product type delivered, total delivery weight)• cube (volume – the space occupied by the freight)• unit loads, roll cages or pallets• location including postcodes and Ordnance Survey reference points.

Customer service implications must be fully considered during the delivery planning process.

• Suitable delivery times• Whether collection is required• Access or parking restrictions• Early closing days• Drop-size limitations

Vehicle limitations and constraints involve the planner in considering the types of vehicles available and their suitability to meet delivery criteria. This can include vehicle type, capacity and size, and involves the factors mentioned under customer service implications above. Using the right vehicle for the right delivery increases efficiency and minimises costs.

Vehicle scheduling and routing represent yet another trade-off between efficiency in delivery and customer service expectations. Success is achieved by meeting customer service targets within budgeted cost parameters.

The areas of vehicle scheduling and route planning are complex ones requiring sound long-term planning backed up by a flexible and proactive operational aspect. The aim should be to meet customer needs within budgeted constraints.

3 Load planning

13

As transport costs come under ever-increasing scrutiny the focus is placed on maximising vehicle usage. One aspect to be considered is the optimal loading and despatch from warehouses, manufacturing plants, ports and other locations and the ability to return with a backload in order to justify the entire journey.

14

Chapter 5 Transport Routing and Road Planning

According to Jonker the purest form of load planning is ‘the allocation of items to a container (or vehicle) so that the resulting load is safe, operationally feasible, and provides an optimal balance between maximum space utilisation and ease of execution’. The objective of load planning is to ensure that the maximum load is carried in each vehicle or container with access for unloading.

Load planning can essentially be broken down into three components – consolidation, cost optimisation, collaboration. With the increasing aspects of legal regulations and directives the four Cs also embrace compliance.

Computer-based vehicle routing, loading and scheduling systems, such as Optrak (www.optrak.co.uk) offer a ‘powerful and flexible vehicle routing, load planning and scheduling tool’ to the fleet manager. Software of this type aids the planner by offering an integrated approach to the issues faced in maximising the vehicle fleet utilisation as well as providing management information that can be measured, eg by key performance indicators to highlight areas for improvement.

4 Key performance indicatorsKey performance indicators (KPIs) are quantifiable measurements, agreed to beforehand, that reflect the critical success factors (of a company, department or project, etc). KPIs help an organisation by defining and measuring progress toward organisational goals. A KPI is a specific measure of an organisation’s performance in some area of its business.

Caplice and Sheffi have differentiated three different types of logistic based KPIs.

• Utilisation: indices measure resource usage and are usually expressed as a ratio of the actual use. An example, expressed in percentage terms, might be ‘vehicle fill’ of 96%.

• Productivity: indices measure ‘transformational efficiency’ and typically take the form of input/output ratios. Ratio analysis is generally utilised in two ways: comparison with performance over a given period of time (eg improvement in vehicle utilisation per quarter) or for comparison with other companies.

• Effectiveness: indices measure the ‘quality of process output’ as a ratio of the actual quality achieved to some agreed norm. Effectiveness can be defined as the degree to which an objective or target is met. An example might include ‘on-time deliveries’ of 97%.

The main KPIs in logistics focus on operational rather than commercial performance.

15

http://www.optrak.co.uk/

CHAPTER 6

Import Customs Controls and Incoterms1 The role of HM Customs & ExciseThe function of the UK body (HM Customs & Excise or HMCE) is to control the import and export of goods in order:

• to ensure no unauthorised goods are allowed to enter or leave the country;

• to ensure that all relevant import and export duties are paid;• to compile trade statistics.

These controls are achieved by licensing the import or export of certain goods or by requiring importers and exporters to submit entries (required details) to HMCE.

Customs duties are indirect taxes levied on imports at the point of entry. They are assessed on the ‘landed value,’ ie the value of goods, freight and insurance as they arrive in the United Kingdom. Duties can be calculated in two ways.

• Ad valorem (by value)• Specific (by unit measurement or weight).

2 Imports and exports within the EUThe Single Market of 1986 introduced ‘four freedoms’ to the European Union, on areas where there had previously been restrictions on free flow: people, capital, services and goods.

The free movement of goods is designed to ensure that goods that are of ‘European Union origin’ (ie which have been manufactured in the EU or which have had import duty paid upon import into the EU, often refered to as ‘Community goods’) are deemed to be in ‘free circulation’ (duty only needing to be paid once) and have ‘Community status’.

Goods transiting EU countries require a ‘movement document’. Goods may be in free circulation, or they may be transiting through the EU to a destination outside the EU without being in ‘free circulation’, or they may have excise duty yet to be paid (eg cigarettes, alcoholic drinks) as examples. Community Transit (CT) is a Customs procedure, that allows

15


goods not in free circulation to move within the EU. When under the procedure the payment of any customs duties is suspended.

The ‘movement documents’ are more commonly known as ‘T-forms’.

16

The single administrative document was introduced to simplify documentation, facilitate trade and allow for computerised communications throughout the EU. In its full eight-copy format the SAD form is intended to be used as a combined export, community transit and import document. However, traders are not required to present all eight copies in every circumstance. The purpose of the form is:

• to allow customs to monitor the movement of goods;• to ensure all relevant duties have been paid;• to ensure regulations, such as statistical declaration, have been

complied with.

The New Computerised Transit System (NCTS) is a European wide automated system to enter declarations electronically and is designed to provide better control of goods in European Union and European Free Trade Area (EFTA) transit. NCTS works by a customs declaration being delivered in an electronic way to customs authorities.

Import and export trade procedures are supported by a range of international computer systems. Customs Handling of Import and Export Freight (CHIEF) is one of the largest and most advanced declaration processing systems in the world.

• Full pre-entry or pre-shipment declaration• Low-value procedure• Simplified clearance procedure (SCP) post-shipment declaration (prior

approval required)• Local export and import control

3 Imports from outside the EUImports from outside the EU will need to fulfil more rigorous criteria than with ‘acquisitions’ from EU countries. The importer of any goods is required to deliver to the proper customs officer an entry on the appropriate form containing prescribed details of the goods, carrying ship or aircraft, port of importation, etc.

All imported goods are liable to examination by Customs. It is usual that the services of an import agent/freight forwarder are used to present Customs entries, usually by computer.

Import duties are levied according to the details defined in the Integrated Tariff of the United Kingdom and Northern Ireland that specifies duties chargeable, preferential rates and quotas together with procedural methods.

Various goods brought into the EU and then re-exported have total or partial relief from import duty and VAT provided certain conditions are met.

17


Imported goods that are intended for export in due course will be able to claim relief from import duty under inward processing relief (IPR) if they comply with the prescribed conditions. IPR is used most frequently when components are imported to manufacture an end product or when goods are returned for maintenance or modification.

Other exemptions can be granted for reimported goods, temporary imports, goods imported under direction and goods entitled to end-use relief.

18

Chapter 6 Import Customs Controls and Incoterms

Carnets are important in the movement of goods both within and outside the European Union. A carnet is a permit or a form of licence designated for a particular purpose, usually temporary importation for a specific purpose such as film equipment, equipment for trade fairs and exhibitions, and equipment for sporting events. The import can then be made into a country or it can be permitted to transit through a country without payment of any duties that would otherwise be due. This is subject to full documentary requirements being met and evidence of the goods leaving the country concerned.

4 Incoterms 2000Sending goods from one country to another as part of a commercial transaction can be a risky business. If they are lost or damaged, or if delivery does not take place, then the climate of confidence between the parties involved may degenerate to a point where legal action is considered or brought. However, the sellers and buyers in international contracts inevitably want their contracts to be successfully completed. The use of Incoterms 2000 can assist in achieving this objective.

Incoterms is a set of contractual conditions or terms that can be adopted into international contracts and which are designed to be understood and interpreted correctly on a worldwide basis. Terms of trade define the risks and responsibilities of buyers and sellers in the sale and delivery of goods to overseas markets. Defined in Incoterms 2000 they represent a set of internationally agreed and widely accepted trade terms that are used by the vast majority of trading nations.

There is no legal requirement to use Incoterms when drawing up an international commercial contract. However, if the parties adopt Incoterms into their contract they are agreeing to be bound by the detailed specifications laid out in Incoterms 2000.

Incoterms are best viewed and understood from the exporter’s perspective as the terms increase the risk, responsibility and cost borne by the exporter as the goods move progressively toward the buyer by offering increasing Incoterms. They fall under four main headings, relating to how the seller makes the goods available to the buyer.

‘E’ terms Goods are made available to the buyer on departure at the exporter’s premises

‘F’ terms Goods are made available to a carrier appointed by the buyer. Main carriage is unpaid.

‘C’ terms The seller pays for carriage but without assuming the risk for loss or damage to the goods after shipment. Main carriage is therefore paid.

‘D’ terms The seller bears all costs and risks to bring the goods to the country or premises of the buyer.

When applying Incoterms to an international sales contract the buyer must be sure that the correct term is used to suit the circumstances. Although

19


negotiation of the right term, from a commercial point of view, is important to the discussion it must also be borne in mind that there is a direct relationship between the choice of transport mode and the choice of delivery term.

20

CHAPTER 7

Warehousing1 The role of the warehouseThe warehouse or distribution centre plays a key role in an organisation’s logistical strategy. Properly designed, planned, organised and managed a warehouse can offer higher levels of service with lower inventory and lower costs. Correct location, good design, appropriate and practical use of inventory and stock location systems and, often, increasing size can make the warehouse a distribution centre rather than merely a stores area. Properly utilised warehouses can enhance customer service and add value to the product.

In a manufacturing warehouse operation the main objective will be to support the various operations by making goods available to meet requirements and supporting this by effective inventory management and stock location systems. In a distribution warehouse operation the role is more customer-facing and will involve areas such as order picking and despatch and delivery.

An early decision is needed on the number of stores facilities required. There is a clear trade-off between costs and service levels: more warehouses mean higher costs but are balanced by quicker response times and greater stock availability.

This balance between one site or a number of sites can be viewed as a ‘centralisation vs decentralisation’ argument. A key disadvantage of centralisation is that it can lead to poor customer service. However, this must be balanced against the convenience of having a single stock line of little used materials, rather than many separate stockholdings all containing items that are little used.

2 Warehousing in different types of organisationIn the manufacturing environment the principal objective of the stores operation is to hold goods, components and assembly items until they are required on the production line. However, other environments also require storage facilities. For example, the retail sector increasingly operates with small storage areas in stores and shops as the floor space can be utilised for selling. This leads to sophisticated centralised distribution centres for companies such as Sainsbury’s and Tesco.

In the public sector, much of the demand for goods, publicity material etc, reflects independent demand (unlike in the manufacturing sector). Items are stored locally on-site in small designated storage areas. Centralised

18

Chapter 7 Warehousing

approaches using storage and distribution depots are used to collate, store and distribute nationally required material although many suppliers offer ‘call-off’ facilities on a local level. The public sector also produces considerable amounts of records and these require storage, often for defined periods of time.

19

3 Warehouse design and layoutTo design a suitable warehouse its purpose must be clear. Basic warehouse operations are movement and storage. Storage is probably the most obvious operation but movement is a vital aspect. Receiving goods, transferring goods to a particular location, selecting particular goods for customer orders and loading the goods for shipment all form an integral part of the movement operation. The warehouse should be designed to allow the goods to ‘flow’ easily.

The design process involves a number of stages starting with a clear understanding of:

• the purpose of the warehouse;• the operations it will fulfil;• the anticipated volume and nature of work that will be undertaken.

Stores facilities can be broadly broken down into two categories; stores buildings and stockyards.

• Stores buildings may be physically separate from the manufacturing sites they serve or may be a section within the main manufacturing locations.

• Stockyards are exterior storage areas used for stock items that will not suffer from exposure to the elements.

4 Storage and movement of stocksThe time and effort put into planning and design are well spent when establishing and designing a warehouse facility. Changes can be made more easily during the early stages of the project and the aim should be to get the correct design and the right technology implemented from the outset, with room for expansion.

Ideally, warehouse facilities should be designed to meet the defined purpose of the warehouse, but this may only be practicable if new purpose-built facilities are being used. Many organisations are seeking to adapt to the limitations and constraints of an existing warehouse and to maximise usage within this remit.

The choice of a suitable storage system will depend on a number of factors, all of which should be balanced with the cost involved.

• Type of goods handled• Suitability of goods for unit loads• Effective utilisation of the ‘cube’ of the building, perhaps requiring

high-aisle racking and hence appropriate handling equipment

20


• Accessibility• Security considerations• Personnel safety

21


Although it is possible to move and reconfigure racking after installation this is a costly and time-consuming operation. Racking forms, for all practical purposes, a permanent internal structure within the warehouse. In consequence, considerable thought should be given to where the racking will be located together with the usage of the goods held on that racking. ABC analysis is often applied within warehouses to help in analysing the flow of work.Dividing goods held into A, B and C categories in terms of annual usage helps to formulate possible positions where stock should be located.• High usage (Category A) items should be located close to entrances,

despatch areas or pick-and-pack areas as deemed necessary.• Medium usage (Category B) items will be located further from the

main areas.• Low usage (Category C) items will be kept in less utilised areas.Fixed location storage, where goods are in a strict sequence with commodity cataloguing or coding, are used where the commodity groups are well defined and the product range is stable. Random storage, as the name suggests, involves putting incoming goods in storage in a random manner. If the warehouse handles standardised goods this method can offer optimisation of racking, allowing for high rates of warehouse fill. The system requires an excellent stock control and location system as goods are placed wherever is convenient.Whether ABC analysis or another system more relevant to the needs of an individual organisation is used, it is important to have a smooth flow within a warehouse environment. Straight-line flows, ‘U’ flows and flows based around usage all follow a ‘one way’ system of movement that serves to reduce congestion and improve safety in the working warehouse environment.All warehousing systems are a compromise between efficient use of warehouse space and ready access to the goods. Warehouse design, the positioning and use of racking and the flow of goods and work through the warehouse are all closely interlinked and should be viewed as such when modelling or simulating the working of the warehouse. For the warehouse to meet its objectives other factors such as workers’ safety, the use of IT and the use of suitable materials handling equipment are all key areas to be considered.When the warehouse is operational it will need to meet key performance indicators in areas such as costs and customer service, as follows.• Costs

– Staff, including overtime and other payments– Building and site– Equipment and other resources– Maintenance

22


• Customer service– Stock availability in the warehouse– Order lead-time– Percentage of orders completed on time– Percentage completeness of order fill– Number of outstanding back orders

23

CHAPTER 8

Materials Handling Equipment 1 Storage systemsThe usual method of storing goods in warehouses is on racks. For safe and efficient operation, the racking system must be designed to interface with both the pallet or other load and the mechanical handling equipment. There are many possible configurations: fixed pallet racking, adjustable pallet racking, drive-in racking, push-back racking etc.

Hand loaded shelving systems can fulfil a wide variety of needs ranging from a small storeoom to a high bay warehouse. Shelving systems are generally made in a modular form that allows for variation in heights, vertical spacing and shelf depths. They offer a versatility that racking cannot. Variations include long-span shelving, closed shelving, carton live storage, and mobile shelving systems.

Carousels are mechanised units that hold material or tote boxes on shelves and bring the required product to the operator. They serve to minimse operator movement and speed up the picking and packing process.

The unit load concept is extensively used in warehouse and distribution operations. Unit loads place product in or on appropriate standard modules that facilitate handling, storage and transportation. Examples include containers, pallet loads and tote boxes.

2 Materials handling equipmentMaterials handling is a major activity within the warehouse environment and will have a direct impact on the effective flow of materials through the warehouse and on the costs involved. Various handling methods are used: manual handling, manually operated mechanical equipment, forklift trucks, crane systems, conveyors etc.

The design of the warehouse and its internal layout and flow should aim to minimise movement within the working environment, for both efficiency and safety reasons. Materials handling equipment can achieve the following benefits.

• Reduce overall handling costs• Allow greater economy in use of space (through higher stock density)• Reduce potential damage to stock

Decisions relating to selecting appropriate types of materials handling equipment follow from the design of the operation, but they also need to

21


examine the nature and purpose of the warehouse. General questions to consider are as follows.

• What requirements are imposed by the nature and types of goods to be handled?

• What requirements or constraints should be considered in respect of the warehouse?

22

• What is the cost-effectiveness of using different types of handling equipment?

• What quantity of material will be handled?• What loading distances have to be travelled (horizontal and vertical)?• Does the use of certain types of equipment enhance safety within the

operation?• What activities are taking place in adjacent areas?• What flexibility is required?

One objective of warehouse operations is to meet customer service objectives. The entire warehouse operation – from design, internal fixtures and fittings, and handling equipment to the pick-and-pack operation – has this as its focus. Indeed warehouses are often becoming involved in areas such as ‘late customisation’ of product in order to meet higher customer expectation levels. To meet these increasing needs the warehouse must have flexible and well-trained staff supported by effective use of IT.

3 Managing unit loads, pallets, cages and tote boxesMuch of the movement of goods and cargo in logistics operations utilises unit loads that are suitable for all the transport modes being used. Pallets, roll cages, tote-boxes, swap bodies and containers (including ISO 20-foot and 40-foot containers) are all in extensive and common usage within the industry. These unit loads offer standardisation that enables specialised handling equipment to be developed. This standardisation makes many unit load devices transferable between operators.

Unit-load devices represent an initial capital investment and significant ongoing expenditure for their recovery, repair and replacement. In consequence, many organisations seek to put in place management systems that allow for monitoring, tracking and recording the movement of unit loads in order that they remain the property of the organisation and that they are maintained to designated and agreed standards. Others, however, do not.

Cost is often a factor in the management control applied. Sea-freight containers cost from £3,000 to £5,000 if purchased new. Vessels may dock, load and unload containers at five or six different ports every voyage. The containers can be the property of shipping lines, leasing companies or individual companies and the on-load and off-load at a port may exceed 200 units. Clearly keeping track of such expensive equipment is a priority but it is difficult. Management control is clearly essential.

Smaller unit-load unit devices such as roll-cages and tote boxes can be very attractive to companies or individuals. Deposit systems are used but often prove too costly to operate or damage supplier/customer relationships. Monitoring and driver training can be an important weapon in

23


attaining continuing ownership as can spot audits if the companies involved agree to them.

Where possible computerised systems should be developed to track and monitor movements, and device identification numbers should be quoted on delivery and return documentation to see what unit loads have been used and whether they have been returned. In a business setting it is often easy to trivialise the return of unit loads, but this is a shortsighted view. Capital expenditure can be high. Being out of stock has a knock-on effect on customer service and staff and drivers see a perceived weakness in management.

24

CHAPTER 9

Inventory Management 1 Coding and classification of goodsStock records should be maintained for the following reasons.

• To indicate the quantity on hand of any item• To indicate when new supplies should be ordered or manufactured• To act as a check on physical stock levels• To record the locations where items of stock are held• To provide financial information, eg for use in pricing

All the techniques for tracing stock movements would be assisted by an efficient coding system. Coding removes ambiguity. A correctly designed coding system eliminates any risk of confusion which might arise from a verbal description of a stock item.

Advantages of a good coding system

• It leads to better identification of physical materials in the factory or warehouse.

• It provides easier reference for recording and analysis.• It offers a better means of identifying and classifying for charging

value to jobs.• It is an aid to all activities of materials management and control.• It is an aid to, or in many cases a prerequisite of, stock control

systems.

Coding systems may be based on the use of numbers (most commonly), letters, symbols or colours, or a combination of these elements. Item codes can be captured on barcodes.

2 Management of the stock rangeThe main purposes of a stock control system are as follows.

• To indicate when an item should be made or bought• To assist in deciding the quantity to be bought or made

23


• To regulate the level of stock for each item so that stockouts and excess stocks are avoided, but costs of investment in stocks are minimised

Reasons for holding stock

• To minimise production costs by means of long production runs• To take account of variable lead times from suppliers

24

• To minimise buying costs by placing infrequent orders for large quantities

• To guard against price fluctuations and seasonal fluctuations

It makes sense for managers to prioritise those stock items with high usage and value when implementing stock control procedures. One approach (ABC analysis) is to identify the key items as Category A, the low-value items as Category C and middle items as Category B. Managers prioritise Category A items, which account for most of the total stock value.

Stockouts can occur if reordering systems have not been considered and implemented. Stock replenishment systems are designed to identify the most appropriate level of inventory that should be held for certain products. The two most common methods are periodic review system (checking stock levels at regular intervals) and fixed-point reorder system (reordering when stock falls to a defined level).

The extent to which the demand for production or resale from stock has been met should be regularly measured and evaluated.

3 Introduction of new itemsOnce an effective stock control system is in place, supported by a suitable coding and classification regime, there will be situations when new stock is introduced and old stock is deleted. The coding system should ensure that each item has a unique reference so that duplication does not occur and that when an item is deleted the number is not used again.

Proliferation of stock codes is a common occurrence if the introduction of new stock is not managed well or if the coding system is deficient. New items should require authorisation before being entered onto the system, with responsibility for this being given to one individual or department. In some cases a formal programme of variety reduction will be appropriate.

4 Obsolete and redundant stocksManagement of stock means minimising areas of waste. One area that often causes problems in organisations is that of obsolete and redundant stock.

• Obsolete stock is stock that has become outdated and is no longer appropriate for current requirements.

• Redundant stock is stock that is excess to foreseeable requirements. Redundant stock can arise from over-ordering or because of a failure to react appropriately to a decline in demand for the item.

Actions that the stores manager could take to reduce the occurrence of redundant or obsolete stock include the following.

25


• Ensuring that patterns of demand are monitored continually so that stockholding policies can be modified in line with changes at an early stage.

• Ensuring that there is regular communication between purchasing and other functions such as marketing, design and production, so that the purchasing department is informed of changes in policies and specifications. This applies particularly in an organisation where the rate of new product development is rapid.

26

Chapter 9 Inventory Management

• Maintaining stocks as low as is practicable on items that are liable to become obsolete – for example, those linked to a rapidly changing market such as that for fashion clothes.

• Ensuring that required items are on hand at the time they are needed or not much earlier, eg by using a materials requirements planning system.

• Instigating regular checks on stockholdings to ensure that the stock records reflect an accurate picture of the physical stock held.

The occurrence of damaged stock can be reduced as follows.

• Check stock carefully as it is received into stores. Damaged or inadequate packaging needs action to ensure that the stock will be protected.

• Use stock in the order in which it is received.• Maintain conditions that are appropriate to the type of stock – for

example, in terms of temperature, humidity and so on.• Train all staff in the use of handling equipment and stress the

importance of moving stock items carefully.

5 Customer returns and reverse logisticsThere are instances when goods flow back in to the company. This is called ‘reverse logistics’, and it is an area that is coming under increasing scrutiny by companies as they seek to improve their customer service offering and gain from the return of usable stock to their managed inventory.

Reverse logistics has a wide remit and return traffic covers a variety of different situations.

• Goods returned, as they are faulty or damaged• Product recall for quality or safety reasons• Unwanted or surplus goods• Pallets, roll cages and other unit load devices being returned after use• Used packaging being returned for recycling or disposal

The reverse supply chain is difficult to implement as it deals with low volume on an irregular basis, often scattered across a wide geographical area. The question that has traditionally been asked is ‘does the cost of securing returns make the operation worthwhile?’

With regard to stock management reverse logistics will involve putting in place practices and procedures:

• to collect surplus or unrequired stock from customers and return it to stock;

27


• to repair damaged but repairable items;• to repack stock with damaged, irrelevant or out-of-date packaging.

28

CHAPTER 10

Controlling Stores and Distribution1 Security in distribution and warehousingSecurity in storage and distribution should cover three main aspects.

• Vehicle security (use of keys, alarms, immobilisers, window etching)• Warehouse security (secure and manned gates, CCTV, precautions

against theft by staff)• Personnel security (taking out references, controls over visitors,

detectors in doors to avoid illicit movement of goods)

Security should be viewed as a strategic objective. Policies should be developed that cover and provide an integrated approach to the key areas of physical security and controls, personnel security and vehicle security. Information technology can play an important role in monitoring and recording activities and events.

The development of a security plan requires strategic investment in surveillance equipment, dedicated personnel, the implementation of policies and procedures and professional advice from outside agencies such as the police, security equipment companies and local authorites.

Security breaches should be logged and monitored for emerging patterns. As stock control systems become more accurate and effective any discrepancies should be investigated.

2 Controlling and managing stores and distributionWarehouse and distribution systems can be integrated into the organisation’s computer network or operate at stand-alone level.

• Organisational level systems will need to integrate with an over-arching system such as materials requirements planning (MRP) or enterprise resource planning (ERP) system.

• Stand-alone systems are more common among smaller organisations. They are usually operationally based providing information required to ensure the operation runs effectively and that identified performance indicators are being met.

The benefits of such systems can be seen in improved levels of customer service through better stock management and location, improvements in

26

Chapter 10 Controlling Stores and Distribution

personnel and equipment utilisation and the ability to develop performance measures and criteria against which the storage and distribution operation can be measured.

27

What is essential for each organisation will depend on its own unique circumstances. The application of criteria for assessing whether storage and distribution are successful will therefore also vary, although optimising costs while effecting the required level of customer service are essential features.

• For storage, optimising costs is focused on reducing stockholdings.• For distribution, optimising costs is focused on the amounts spent on

road hauliers, third party contractors or warehouse storage.

The systems within the stores and distribution environment are required to meet both interfacing and operational needs

• Order processing and progressing.• Total document generation. Integrated systems permit a complete

record of an order from initial placement through to despatch.• Barcode reading of goods entering, moving around and leaving the

warehouse. • Direct input to HM Customs & Excise systems, particularly by EDI

systems.• Automated warehouse goods retrieval applications.• Automatic report generation, particularly related to stockholding

and stock location.• Computer simulation modelling and contingency planning.• Vehicle loading and scheduling.

3 Performance criteria in stores and distributionPerformance measurement and monitoring are important to the effective management of any organisation. Measurement provides information at both strategic and operational level.

• At the strategic level, measurements relate to long-term planning and direction. The measurement of key criteria evidences how an operation is performing against anticipated goals and may highlight areas that require review or additional investment.

• At the operational level measurement has more to do with the effectiveness and efficiency of the operation and how it is reaching industry or customer service standards.

In logistics, and particularly in storage and distribution, it is important to have standards against which performance and productivity can be measured. Many areas of the logistics operation concern intangibles, particularly customer service and quality, and these are difficult to monitor.

28


Service levels will often involve both the storage and the distribution function as problem areas may be in one or the other, or at the interface between the two operations. Service level measures can include stock availability, order lead time, on-time orders, accuracy and completeness of order fill, number of back orders etc.

29


An accepted measure of productivity standards is the use of performance ratios. Ratios are frequently used in business particularly in assessing financial aspects and increasingly in assessing performance in logistics. Ratios compare one magnitude (a relative size) with another in the form of a multiple, such as 2: 1, or a fraction, a percentage or rate.

An example of the application of ratios is with stock-turn, which can be calculated as follows.

Stock turnover ratio = × 100

Comparative ratios are used extensively in the storage and distribution area. Within organisations one warehouse or operation can be compared with another of similar size and function. Externally figures are often submitted to trade organisations such as the Warehousing Association or transport bodies who publish to those who subscribe.

Comparative analysis is an effective management tool but in today’s competitive marketplace many organisations take this a stage further and benchmark against similar organisations on a national or international level. Benchmarking is the establishment of targets and comparators, through whose use relative levels of performance can be identified. With the adoption of identified best practices it is hoped that performance can be improved.

4 Efficiency and effectiveness in stores and distribution

Performance indicators can be used to measure the efficiency and effectiveness of the storage and distribution function.

• Efficiency can be defined as the relationship between inputs and outputs achieved. The fewer the inputs (both goods and services) used by an organisation to achieve a given output, the more efficient is the organisation.

• Effectiveness is the degree to which an objective or target is met.

The performance of a manufacturing organisation and its constituent activities will commonly be measured in quantitative terms. The performance of services and other aspects of the operations process may be more difficult to quantify and other non-monetary and qualitative factors may be used. The role of storage and distribution falls into both of these areas.

Productivity is a measure of the efficiency of resource usage and expresses the rate of output in relation to the resource used, which could be a machine or a person. It is closely linked with both efficiency and resource utilisation. This is often described in non-financial terms.

30


Examples of productivity measures include units picked and packed per person, actual storage as a proportion of full capacity storage, productive hours as a proportion of total hours paid, and value added, in total or per employee.

31

CHAPTER 11

Operational Research Techniques 1 Network analysisProjects frequently comprise a large number of separate activities which are related to each other in terms of their timetabling. For example, it may be that Activity C can only be commenced after Activities A and B have been completed. Network analysis is the process of analysing the relationships between activities and exhibiting them in a diagrammatic form. In order to draw a network diagram it is necessary to have estimated durations of each activity.

Nowadays, the creation of a network diagram invariably involves the use of a computer. The project planner can enter data about the activities (eg the duration of Activity C, and the fact that it can only begin after completion of Activities A and B). The computer program can then draw the network diagram, as well as producing various items of management information useful to the planner.

An important benefit of using network analysis is the enforced need to think clearly about the project activities. Once this is done, the computer software can calculate, for example, which activities are on the critical path. These are the activities where any delay will lead to a delay in the overall completion of the project. Similarly, the computer can calculate which activities have float (ie the activities which take less time than is actually available) and how much float they have.

Once the network diagram has been drawn, we can derive useful information from it. For example, it will at once be clear how long the project is going to take overall.

2 Distribution modelling and simulationThe process of distribution can be regarded as an elaborate system, comprising numerous elements. These include people (logistics staff, customers etc), premises (warehouses etc), equipment (handling equipment, delivery vehicles etc) and much more. Effective handling of these components, and effective management of their interactions, leads to an efficient distribution system.

In practice, all of these things change over time. Customer demands and expectations may increase (they rarely decrease!) New premises may be acquired, existing facilities may be disposed of or resited. Such changes

29


mean that the distribution system is dynamic: it changes constantly. This presents challenges to management.

One way of maximising distribution efficiency, and coping with change, is the use of a model or simulation. This means that the elements of a distribution system, and their interactions, are expressed in precise terms and embodied in computer software.

30

For example, with a suitable computer program we might enter a desired stock service level, eg 90 per cent in-stock availability. By playing with the computer model, we could analyse the likely effects of changing this. If we wish to improve the service level, it is likely that we will have to hold a higher average level of stock. The software will be able to quantify this, and calculate the additional costs that will result.

Without a model, the obvious way of testing this change would be to implement it in practice. This is clearly impractical if we are considering a large number of possible changes, and might also be very expensive if the changes proved to be ill-judged.

It would be possible to design a model that could be used for ‘optimising’ a solution. Managers could give weightings to such factors as delivery lead time, cost minimisation etc. The scenario that scored best on these predetermined criteria would then be ‘optimal’.

In practice, this is rarely how modelling is used. The large number of relevant factors makes it too difficult and subjective to implement. Instead, the approach is usually to examine a number of possible scenarios within the model and to analyse how each performs.

3 Queuing theoryQueuing theory is used in service situations where managers must determine a trade-off between resource utilisation and customer satisfaction. Employ a large amount of resource and customers will be served quickly, but at slack times some of the resource will be idle. Employ less resource to avoid this and the result is that customers may have to wait for service at busy times.

The problem is familiar to anyone who has ever queued for service in a bank or a supermarket. As a customer, we wish for plenty of bank tellers and supermarket checkout staff. But managers in the bank and supermarket must avoid excessive idle time for their staff, which could easily arise if too many staff are allocated to these duties. Getting the balance right is crucial.

Similar problems can arise for the distribution manager. Such managers have to deal with customers and customer orders arriving at unscheduled times. There is no problem if customers always arrive at a steady, known rate per hour, and if it always takes a known, constant amount of time to serve each customer. In practice, though, each of these factors varies in an unpredictable way. So how many warehouse staff, for example, should we employ to cope with this?

Queuing theory helps to provide optimal solutions to this kind of problem. To begin with, we must make assumptions about the two main factors identified above: the pattern of customer arrivals, and the time taken to serve each customer. The first factor is assumed to be described by a

31


Poisson distribution. The time taken to serve customers is assumed to be described by a negative exponential distribution.

We then need to define the main parameters that we are interested in (eg average number of customers arriving per hour, average number of customers that a server can process in an hour, number of servers, average number of customers in the system. With this kind of information the manager is able to make sensible choices about the level of resource to devote to serving customers.

32

CHAPTER 12

Health and Safety 1 Managing health and safetyThe warehouse environment necessitates a variety of operations: the manual handling of goods; forklift trucks loading and unloading, reversing and manoeuvring; stock checks using mobile communications; and ‘picking and packing’ to name a few. Too often the operator or individual involved is concentrating on their own role and ignoring what is going on around them.

Manual handling accounts for about 25 per cent of reported injuries in industry and correct procedures need to be put in place to reduce the likelihood of this type of injury occurring. Recent years have seen an increase in employees taking their employers to court if procedures or training that should have been in place or should have been carried out have not been implemented correctly. Other hazards such as collisions, vehicle overturns, poor handling of dangerous goods, collapses and equipment malfunctions must all be considered, particularly when working in a time-pressured customer service environment.

Acts and regulations on health and safety are both wide-ranging and general in nature. Together they offer a mix of regulations designed to address all relevant issues concerned with health and safety. Like all Acts and regulations they are subject to change and updating.

The main UK legislation is contained in the Health and Safety at Work Act 1974 which has, along with earlier Factories Acts, made it clear that the law views safety as everybody’s responsibility, not just managers, supervisors or operators. Each individual is legally bound to take responsibility for not only their own safety but also the safety of others around them. The main Act is supported by various regulations, the principal ones often being referred to as the ‘six-pack’.

• The Workplace (Health, Safety and Welfare) Regulations• Management of Health and Safety at Work Regulations• Manual Handling Operations Regulations• Health and Safety (Display Screen Equipment) Regulations• Provision and Use of Work Equipment Regulations• Personal Protective Equipment at Work Regulations

In addition, the Lifting Operations and Lifting Equipment Regulations 1998 (SI 1998/2307) have a direct link with warehousing operations.

31


To support the HSWA, health and safety inspectors have extensive powers confirmed in the Act. For example, they may issue an improvement notice (requiring defined action within a defined time period), or a prohibition notice (forbidding the continuance of any practice judged dangerous by the inspector).

32

2 The COSHH regulationsThe Control of Substances Hazardous to Health Regulations 2002, more commonly referred to as COSHH, control the storage and use of hazardous chemicals and substances in the workplace. Their purpose is to protect members of the workforce and others from the dangers of exposure to hazardous chemicals and substances through direct contact, inhalation or ingestion, which may jeopardise health.

The COSHH regulations impose on employers (and self-employed persons) a statutory duty to protect employees and other persons who may be exposed to hazardous substances. They place restrictions and/or prohibitions on the importation, supply and use at work of designated substances that are of a hazardous nature.

Many substances pose a risk to people. The transit of hazardous material by road, rail, sea and air is highly regulated in order to minimise these risks while allowing business operations to continue. As technology has progressed and science has continued to develop, an ever-increasing range of complex and possibly hazardous materials are being used in the workplace.

The COSHH regulations seek to impose clear responsibilities on the handling and use of hazardous materials in the work environment. According to the Health and Safety Executive more people die at work from contact with hazardous substances than die at work from accidents.

Exposure to hazardous material can relate to:

• substances used in the work environment and work processes including adhesives, paints, thinners and cleaning agents;

• substances generated during the work process such as gases, vapours, fumes and dust;

• naturally occurring substances such as dust and mould on grain or fertiliser nuts used in agricultural work.

Under the regulations employers are required to make a suitable and sufficient assessment of any health risk created by the work and the measures needed to be taken, as a consequence, to protect people’s health. Precautions must be taken to prevent or reduce those risks as far as possible. The employer must also make arrangements to deal with accidents, incidents and emergencies.

3 The transport of dangerous goodsThe movement of dangerous cargo has increased considerably over recent years and strict codes of acceptance and carriage are laid down for all forms of transport to ensure that the dangerous cargo can be carried safely and without undue risk. These rules relate to such areas as:

33


• proper description of cargo• quantity per package• types of packing acceptable• documentary requirements.

34

Chapter 12 Health and Safety

Principal areas of dangerous goods legislation include:

• the classification, packing and labelling of dangerous goods• the carriage of dangerous goods in packages and in bulk• the stowage of dangerous goods on all transport modes• the marking of vehicles• safety equipment to be carried• documentation to be carried• the training of loaders, drivers and other operational staff who have

areas of responsibility for dangerous goods movements• the requirement to appoint a dangerous goods safety adviser (DGSA).Responsibility for compliance with dangerous goods regulations rests with business undertakings or individuals involved with the loading, unloading or transport of dangerous goods. They have a duty:

• to prevent risks to health and safety of persons• to prevent damage to property and the environment• to ensure that all those involved in the movement of dangerous goods

hold the relevant qualifications or certificates• to ensure that drivers, loaders and other involved staff are trained in

emergency action procedures.The United Nations Committee on the Transport of Dangerous Goods publishes the Recommendations on the Transport of Dangerous Goods more commonly known as the Orange Book. These regulations are submitted to the various authorities which govern transport modes and it is these authorities, using the recommendations as a basis, that formulate the regulations for their transport mode.

The carriage of dangerous goods by sea from the UK is regulated by the Merchant Shipping (Dangerous Goods) Regulations 1981 and subsequent amendments. The book used by shippers is the Department of Trade’s Carriage of Dangerous Goods in Ships book, more commonly known as the Blue Book. This conforms to the International Maritime Organisation Code and the SOLAS convention (Safety of Life at Sea).

The carriage of dangerous classified cargo by sea requires special precautions, procedures and facilities concerning shipment.

The carriage of dangerous goods by air from the UK is regulated by the UK Air Navigation Order 1985 and the Air Navigation (Dangerous Goods) Regulation 1986. These require compliance with Technical Instructions for the Safe Transport of Dangerous Goods by Air, a publication which is revised bi-annually. The International Civil Aviation Authority (ICAO), a UN agency, produces the instructions.

Airlines apply the IATA Dangerous Goods Regulations, which are more restrictive than the ICAO instructions. These regulations have no legal basis

35


and the ICAO instructions will always be applied in the event of incidents going to law. IATA regulations are more restrictive than those for maritime transport with certain substances having severe restrictions imposed on them and some being forbidden altogether.

36

CHAPTER 13

The Role of Information and Communication Technology 1 The role of ICT in stores and distributionStores and distribution personnel have greater demands placed on them than ever because of their role in supply chains and their interface with the customer. To operate effectively the warehouse requires a fast, flexible and accurate IT system with the ability not only to control operations and reporting within the warehouse, but also to provide required information to any number of outside users.

Control and information systems should perform the following tasks.

• Capture delivery information accurately• Record stock movements• Maintain stock balances• Monitor productivity and utilisation• Track the movement of goods through the system• Sort order requirements into appropriate picking tasks

New technology has led to major advances in the abilities of information systems. Within logistics management, order processing, inventory and warehousing management, and vehicle management have all seen considerable developments allowing for a range of improvements.

• Enhanced speed of order entry and order processing can reduce lead-time.

• Transport can be scheduled more accurately and put on the most economical routes.

• Warehouse planning and utilisation can be more cost-effective and improve customer service.

• Better management of inventory reduces delivery costs.• Administration can be more accurate.

The impact of IT in warehouse operations has been impressive in recent years.

• Radio frequency identification discs (RFID) allow for more information on products to be captured by the stock management system.

34

Chapter 13 The Role of Information and Communication Technology

• Electronic data interchange (EDI) allows the transfer of standardised or formatted data for declarations to HM Customs & Excise or standard inter-company data and reports.

• Increased computing power, the internet and increased use of e-mails have also benefited warehousing.

2 Major developments in ICTBarcodes use printed bars of varying thickness and combinations to identify products. They are cheap to print and the reading technologies are varied and reliable. However the barcode is over 20 years old and, although it is effective for product recording and recognition, technology has moved on around it. Wireless techniques for transmitting barcode data across uncabled distances are potentially valuable for online inventory operations and are in extensive use by both centralised and hand-held recognition units.

Barcoding can serve many functions in warehousing.

• Verification of stock levels• Identification of stock location• Tracking and tracing the movement of goods and despatch details

Optical character recognition (OCR) uses fixed-beam or line-scanners to read documentation and labels and to feed the information back through a software package. Labels and documentation often follow a standardised format to allow for this purpose. Widely accepted, OCR helps eliminate the risk of error that occurs when data is entered manually onto a system. It is also time-effective.

Radio frequency communication forms an internal communication link between workers and a central control point in the warehouse. Radio communications allow workers to receive and act on information, and provide feedback. Automated warehouses develop this technology further by using automated stock storage and retrieval systems, which are often linked to automated guided vehicles to place, collect or retrieve stock.

Radio frequency identification (RFID) represents potentially the biggest change since the introduction of barcode technology. RFID tags can be embedded on each product allowing the data within the tag to be transmitted to a computer interface unit or to readers at a distance. Already established in a number of industries, such as livestock identification and automated vehicle identification systems, the costs are now being reduced to the point where RFID tags can be cost-effective at consumer level.

A significant advantage of RFID systems is the non-contact, non-line-of-sight nature of the technology. Tags can be read through a variety of substances such as snow, fog, ice, paint, crusted grime, and other visually

35

and environmentally challenging conditions. RFID systems are developing at a fast rate in the retail sector but are also finding increasing acceptance in the area of transportation and distribution.

In a warehouse or manufacturing setting, RFID systems are very well suited to the identification of high-unit-value items through manufacturing and onto storage and distribution. As RFID costs reduce, their application will become more widespread and cost-effective.

3 The internetThe internet and the world wide web are an accepted framework for implementing and delivering information system applications. The internet is the infrastructure on which the web is based, ie the resources of the web are delivered to users over the internet.

36

Chapter 13 The Role of Information and Communication Technology

The internet is a global collection of networks that are interconnected using a common networking standard – TCP/IP (transmission control protocol/internet protocol). The world wide web (WWW) is a collection of resources (programs, files and services) that can be accessed over the internet.

An intranet is a private network that utilises internet protocols but is usually only accessible to a number of users. These are usually within the same organisation or work group. Access is restricted by a number of means including passwords, firewalls and user group account names.

An extranet is an intranet that has been extended to include directly related business users outside the organisation (an example would be the CIPS website which is accessible to members via membership number and password but offers a level of accessibility to non-members). Other examples are suppliers, large customers and strategic business partners who can all be allocated differing levels of access, if required.

An extranet allows separate organisations to exchange information and coordinate their activities. This in turn can lead to a virtual organisation that is a loosely linked group of people and resources that work together as though they were an organisation. Additional security can be provided by operating a virtual private network which is a network based on leased dedicated telephone lines that is built on top of the internet infrastructure. This, when linked to entry protocols, serves to provide a higher degree of security.

The rapid growth in the use of internet-based technologies has allowed organisations to become more flexible in the way they operate. The speed and accuracy of communications brings with it a host of benefits that helps improve the effectiveness and efficiency of an organisation.

Electronic data interchange (EDI) is the system-to-system exchange of documents between companies and has long been established and embedded in many organisations’ operating procedures. Purchasing departments use EDI to transmit purchase orders and shipping details, for receiving advices or for sending or receiving invoices. Within a storage and distribution or integrated logistics network operation EDI links can provide regular formatted and agreed information on a range of issues (such as goods received, goods held, delivery notes and HM Customs & Excise details).

As the internet and e-mail have gained greater acceptance, the flexibility offered by these systems has led to some organisations moving away from traditional EDI links to develop more integrated, secure and flexible systems to meet their particular requirements.

EDI can be compared and contrasted with email. Email enables free format, textual transmission of messages by electronic means between people. EDI sends structured business messages to an agreed format transmitted electronically between computer applications. An example would be an

37


exporter or importer providing regular information to HM Customs & Excise at set times and in a predetermined format.

38

CHAPTER 14

Enterprise Resource Planning and New Developments 1 Enterprise resource planning (ERP)Materials requirements planning (MRP) was developed during the 1970s and allows low levels of inventory to be held based on production schedules and forecasts. Manufacturing resources planning (MRP II) took this a stage further to enable examination of costs, performance analysis and existing processes.

Enterprise resource planning (ERP) develops the concept of MRP and MRP II even further to embrace all business functions, not only those concerned with operations. ERP encompasses materials planning, profitability, supply chain management, human resources and customer satisfaction – every aspect of business.

CIPS defines ERP as: ‘Computer-based systems designed to process an organisation’s transactions and facilitate integrated and real-time planning, production and customer response’. Enterprise resource planning (ERP) is the practice of consolidating an enterprise’s planning, manufacturing, logistics, supply chain, sales and marketing efforts into one management system.

The benefits gained from ERP are a general reduction in costs (such as inventory, investment, transportation etc), together with efficiency and flexibility gains. At present it is only the larger organisations that have the ability to develop and integrate ERP systems but as the process becomes more accepted and effective smaller organisations will be able to assess and, where applicable, benefit from these advances.

ERP systems are increasingly being used, at this stage primarily by multinational organisations, to integrate all aspects of the business into one unified database that interfaces across the entire organisation.

2 Efficient consumer responseEfficient consumer response (ECR) is a grocery industry strategy that was created in January 1993 to gain some of the benefits that come from the supply chain approach and closer collaboration in business relationships.

The ECR approach enables retailers, distributors and suppliers to work closely together to being better value to the grocery consumer (although the application is spreading outside this original remit, particularly to fast-

37


moving consumer goods (FMCG)). By collaboratively focusing on the efficiency of the total supply system, rather than its individual components, members can work toward reducing total system costs, inventories, and physical assets while improving the consumer’s choice.

38

ECR is defined by the UK Institute for Grocery Distribution as ‘the link to make category management an operational reality, suppliers and retailers working together to ensure total consumer satisfaction’. The objective of ECR is a responsive, consumer-driven system where retailers, distributors and suppliers work collaboratively as business partners to maximise consumer satisfaction and minimise cost.

The main purpose for implementing ECR is to provide better value for customers and to lead to improvements in overall business performance. Within ECR a limited number of KPIs have been chosen by the Global Commerce Initiative: service levels, on-time deliveries, retail distribution, lead time and perfect orders.

3 Lean and agile thinkingJust in time has proven itself over time as an effective approach and philosophy to manufacturing and stock control. The main tenets of just in time have been developed further by ‘lean production’, an approach that takes the best of modern thinking and integrates it into an overall approach to manufacture.

‘Lean production is “lean” because it uses less of every thing compared with mass production: half the human effort in the factory, half the factory space, half the investment in tools, half the engineering hours to develop a new product in half the time. Also, it requires far less than half of the needed inventory on site. The expected results are fewer defects, while producing a greater and ever growing variety of products.’

Five principles that characterise lean production organisations.

• As far as possible, tasks and responsibilities are transferred to those who are actually adding value on the production line.

• Discovering defects and problems immediately, and eliminating their cause, is an important objective of control systems.

• A comprehensive information system enables everyone to respond quickly.

• Organisation must be based on empowered work teams.• This in turn encourages a strong sense of reciprocal obligation

between staff and the organisation.

Lean manufacturing uses and further develops the concept of the ‘seven wastes’ pioneered by Toyota Motor Company’s former vice president Taichi Ohno: overproduction, excess inventory, transportation, waiting, unnecessary motion, over-processing and correction.

Lean and agile thinking involves organisations working together in a collaborative manner, working to reduce waste, use appropriate production systems and have a genuine customer focus across their joint operations. Removing waste means reducing elements within the supply chain that do

39


not add value but do add to costs. This implies a close and long-term relationship with major suppliers.

40

Chapter 14 Enterprise Resource Planning and New Developments

4 Outsourcing and fourth party logisticsAs this specialist business area develops its offering into the future some are looking to extend by spanning the activities of the entire supply chain. Operators cease to become logistics providers and become fulfilment providers or partners throughout the entire supply chain (the supply chain management partner – SMP). Another potential growth area is that of fourth party logistics providers (4PLs), who operate as the lead logistics provider (LLP) with a role to organise the entire logistics provision for a given organisation using a number of providers. The 4PL may just offer a management and customer service role while removing itself from the physical movement and storage of goods.Accenture define a 4PL as follows.‘A 4PL is an integrator that assembles the resources, capabilities, and technology of its own organisation and other organisations to design, build and run comprehensive supply chain solutions.’4PL is a refinement on the concept of 3PL. Unlike a 3PL, a 4PL is not asset based (eg transport, warehouses, equipment), and uses a 3PL or a number of 3PLs to supply service to customers. A 4PL only owns computer systems and intellectual capital and operates, in effect, as an outsource manager of outsourced operations using its management and organisational structures to organise on behalf of its client.3PL providers often claim to offer integrated or total logistics but are often constrained by their own limitations in terms of intellectual capital and physical resources. Strategic alliances formed with other 3PL providers extend the reach but may only offer a piecemeal approach. 4PLs offer a more strategic involvement by working more closely with client organisations enabling closer IT and management interfaces that meet client needs.

5 Alternative fuelsOur society and industry relies on large amounts of energy and that the world is becoming increasingly dependent on fossil fuels. The problem has been exacerbated in recent years as the economies of China and India, in particular, develop and require increased energy and commodities. It is understood that there is a direct link between the way we produce energy and the damage caused by pollution. Finding cleaner and alternative ways of producing energy is important to the future of our planet.Alternative energy is a term used to describe sources of energy that occur naturally in the environment. Energy from sources such as wind turbines, solar energy, hydropower and geothermal power may provide part of the solution.The commercial implications of climate change go beyond the simple, though vital, need to reduce energy use. As the regulatory framework

41


surrounding carbon emissions expands, this will have fundamental consequences for business performance and company valuation.The increase in environmental concerns has implications for all operational managers. Purchasing, particularly of capital equipment, should be based on whole life costing. One key aspect of the whole life costing approach is the energy usage of a product over its lifetime. Increasingly (in common with many household appliances) energy efficiency is a major selling point.

42

Documents

CHAPTER 1 - Profex · Web viewCIPS Level 5 QUICK START GUIDE Storage and Distribution First edition for new syllabus July 2006 Published by Profex Publishing Limited 7 North Road