Integrating the Warehousing and Transportation Functions of the Supply Chain

Scott J. Mason, P. Mauricio Ribera Department of Industrial Engineering

University of Arkansas 4207 Bell Engineering Center Fayetteville, AR 72701, USA

Jennifer A. Farris

The Grado Department of Industrial and Systems Engineering 0340 Campbell Main

Virginia Tech Blacksburg, VA 24061, USA

Randall G. Kirk

University of Arkansas 700 Research Center Blvd. - MS 28

Fayetteville, AR 72701, USA

Abstract Electronic commerce and associated business-to-business transaction capabilities have changed the way in which the supply chain operates. The Internet has enabled information exchange on an unprecedented scale, often at a pace too fast for normal consumption. Companies are not equipped to make effective use of data from warehouse and transportation management systems. These systems are key factors in integrating the physical flow of goods along the extended supply chain. We explore the potential for this virtual warehouse paradigm to improve customer service through improved efficiencies, reduced costs, and reduced lead-time variability. 1 Introduction Ganeshan and Harrison [1] define a supply chain as a network of facilities and distribution options that performs the functions of materials procurement, transformation of these materials into intermediate and finished products, and product distribution to customers. Every industrywhether manufacturing to servicecan be described by the combination of one or more supply chains. Despite their vital role in industry, supply chains have traditionally been fragmented, resulting in slow and sequential material flow downstream and similar movement of data back upstream. The disconnected flow of inventory and information has led to a lack of real-time information and a build-up of excess inventory to buffer uncertainties in supply and demand. Increased inventory carrying costs, longer order lead-times, and difficulty in responding proactively to real-time changes have decreased profits and weakened customer goodwill. The primary reasons for logistics changes in growing companies are new requests from customers, ongoing improvement in internal processes, and re-evaluation of company logistics strategies [2]. Recently, two primary objectives have emerged from researchers investigation into supply chains. First, companies seek to optimize every stage of the supply chain individually to add maximum value for all parties involved. Second and more importantly, companies strive to optimize the operation of the supply chain as a whole in areas such as product delivery time, inventory holding cost, and overall cost-to-market [3]. The recent explosion in the development and capabilities of the Internet is changing the requirements for effective supply chain management. Electronic commerce and associated business-to-business transaction capabilities have changed the way in which the supply chain operates. The Internet has enabled information exchange on an unprecedented scale, often at a pace too fast for normal consumption [4]. However, increased access to real-time information has not guaranteed that companies are able to do something with this data or, more importantly, to do

the right thing with it. In addition, although companies may now share a number of real-time data streams, including supplier or customer warehouse levels, key customer ordering patterns, and relative location of important supply chain assets, little evidence exists to suggest that something is being done with this information. The sheer volume of available data is too massive for any one person or group of people to decipher. Furthermore, no data analysis tools currently exist capable of comprehending real-time information and making informed decisions based on it. The advent of computerization and the Internet has revolutionized most warehouse operations. Internet technology allows warehouse managers to receive orders more expeditiously and allows them to track the inventory connected with those orders. There are some drawbacks, however. Because the Internet has provided a lower cost way of placing an order, warehouses are experiencing more frequent, smaller quantity orders [2, 4]. This makes the task of consolidating orders to economic shipment quantities more challenging and it also forces companies to confront the trade-off between quick-response (more frequent shipments) and inventory carrying cost. Increased shipments typically increase transportation costs while decreasing inventory holding coststhus the characteristics of the product being moved or stored, such as its value, size, and typical demand pattern seasonal or regular) determine if the savings in inventory holding costs pays for the cost increase in transportation. Real-time information of the product flow becomes the tiebreaker for both sides of the business equation in terms of trading off transportation and inventory costs [4]. 2 Warehouse and Transportation Management Systems Companies are not properly equipped to make informed, effective decisions based on the data collected by warehouse management systems (WMS), which contain data such as supplier/customer warehouse inventory levels and key customer ordering patterns, and by transportation management systems (TMS), within which information pertaining to the location of important supply chain assets such as products or vehicles is typically stored. For example, a company today may have full knowledge of an order cancellation prior to the orders scheduled delivery time, but is very often unable to react to the situation in real-time through rerouting or other corrective action. Thus, even though companies visibility into supply chain inventories is constantly improving, this improved visibility has not translated into companies making better decisions. WMS often contain information on operational efficiencies and cross docking requirements, wherein a product is received in a facility, occasionally grouped with other products going to the same destination, then shipped at the earliest opportunity without going into long-term storage [5]. Further, WMS can be utilized for order management and consolidation, as well as for comprehending the continually exploding list of product SKUs due to customers requirements for mass customization. Most researchers have approached the management of inventory from an operational perspective. These include deployment strategies (push versus pull), control policies (determining optimal levels of order quantities and reorder points), and safety stock level setting at each stocking location. These safety stock levels are critical, since they are the primary determinants of customer service levels [6]. With effective inventory planning and vendor cooperation, supply chain costs were expected to go down 9% by the year 2000 [7]. From the WMS point of view, the only way to handle more shipments is by knowing items characteristics a priori, such as item dimensions, location, and destination [8]. Effective inventory management alone is not a sufficient means for companies to reduce supply chain costs and improve customer service levels. Gilmore and Tompkins [9] refer to TMS the glue that holds the supply chain together by tracking the physical flow of goods. The importance of TMS functions is emphasized when one considers that transportation costs typically amount to 2-4% of the total value of goods shipped and between 30% and 60% of a companys total logistics expenses [1, 9]. Recent studies suggest savings of 10-40% of transportation costs (up to 60% of material handling costs) upon first implementation of a TMS [10]. TMS are typically used as decision support tools in two areas: planning and optimization and transportation execution. During planning and optimization efforts, TMS determine the transportation mode(s) and also manage freight consolidation operations and coordinate company shipments, including continuous freight moves (5% to 8% of the total freight payment). When used in execution or operations mode, TMS are either directly or indirectly responsible for carrier load tendering, routing and scheduling, shipment tracking and tracing, and freight payment and auditing [9].

Todays supply chain management systems must not only be able to provide real-time data but also to integrate data across the supply chain and to support real-time decision making in response to changing conditions. As both WMS and TMS are the primary tools involved in supply chain execution, they are the key factors to integrate the physical flow of goods along the extended supply chain. The most promising opportunity for achieving efficient management of the extended supply chain management is through full systems integration between WMS and TMS [11]. In the past, the warehousing and transportation segments have been optimized in isolation, but as of late, several WMS vendors are beginning bring TMS capabilities into their systems, either through the acquisition of transportation management system providers or through partnerships. Currently, most WMS/TMS systems are not fully integrated, however, the industry as a whole is moving quickly toward process-level synchronization [11]. Through information exchange, inventory visibility, and intelligent decision support software, shipping firms are trying to reduce their operational costs while simultaneously maintaining current customer satisfaction levels. In order for a supplier to offer consistently high service levels to its end customers at a low price, the supplier must be able to manage its own supply chains within tight cost tolerances. Otherwise, if suppliers are unable to successfully keep their supply chain costs down, these increased costs will find their way to the end customer in terms of increased purchasing costs. Both suppliers and customers need to be able to order and ship products in appropriate quantities at affordable prices. The integration of WMS and TMS systems and the associated data analysis tools that will be developed will facilitate the reduction of suppliers operational costs, thereby resulting in a decreased product cost for the end customer. 3 Integration of WMS and TMS Our overall goal is to understand how WMS and TMS can work together to reduce the overall costs within a supply chain, to reduce lead times while increasing reliability. The explosion of Internet technology and the demand from customers for more frequent, smaller deliveries and shorter lead times has led to the need for a much tighter integration between WMS and TMS. The goal is for todays systems to work like one unified and seamless application [2, 9]. Using real-time warehouse management one company has already achieved nearly 100% accuracy in locating inventory and an efficiency of 99.9998% [12]. The potential for improvement from a fully integrated system is even more inclusive. In order to achieve this goal, suppliers, retailers, and carriers need to share inventory levels, production schedules, demand (inbound/outbound orders), product characteristics (dimension, location, destination), available resources (transportation mode characteristics, warehouse capacity), and business rules (delivery-driven shipments). One integrated TMS and WMS operation is provided by SAP, Inc [13]. The description of this system is used as an example of the functions of a typical integrated system. The order fulfillment process begins with a group of orders being transferred from the enterprise resource planning (ERP) system or a Web storefront to the order management system. The orders pass to the WMS to manage the planning needed for the packing process including preparing the boxes and containers that will be needed to fill the orders in the warehouse. At the same time, the TMS analyzes the best way to source and ship the orders thereby saving the time that would be lost by sequential and segregated WMS and TMS operation. The TMS can also examine real-time inventory levels at multiple facilities and, based on optimum transportation costs and customer service, identify which facility should be used to fill the order [9]. Inventory visibility and real-time order tracking also make it possible to synchronize shipments arriving from multiple facilities. Shipments arriving at the same time save inventory and documentation cost. The planned orders are then passed back to the WMS to initiate the picking process. Meanwhile, the TMS schedules pickup with the appropriate carriers. The TMS can print shipping labels and documentation as well as verify the load before it leaves the facility. When the order is delivered, the TMS can audit the order, initiating the payment process. Post-shipment information may also be used for analysis of the carrier's reliability when rate negotiations come up again. In order to effectively exchange information, transportation providers must become a full part of information collection and distribution. The use of automated data collection (ADC) by transportation providers allows effective implementation of several cost saving and service-improvement initiatives as Quick Response [14]. One example of these is the advance ship notice (ASN). An ASN notifies customers immediately when goods have been shipped. Because incoming goods can be pre-allocated inventory space, and thus can be rapidly put-away or cross-docked, the use of ASN can significantly reduce material handling, inventory, and documentation costs [14]. In order for

these savings to be realized, however, an ASN must be shown to be accurate. Through barcode scanning at point of shipment and similar technology through the transportation chain, an integrated WMS/TMS can ensure accuracy and electronically report discrepancies. Today, the transportation industry as a whole continues move slowly toward a broader range of ADC implementation, although certain major carrierssuch as UPS, RPS, and FedExhave achieved full ADC integration. In the software industry area, one survey showed that one-third of the responding company expected to upgrade their electronic data interchange (EDI) systems in 2001 and almost as many expected to install extensible markup language or XML technology [15]. To facilitate the automatic exchange of data, integrated WMS/TMS systems often employ the latest wireless communication systems, as in the following system created by Menlo Logistics [12, 14]. Along with order shipments schedules, the WMS automatically creates radio frequency (RF) pick frequencies which operators use to load orders. The system also uses RF and barcode scanning to validate the removal and shipment of inventory. In addition, carrier and customer acceptance can be communicated via EDI, automated fax, or telephone voice response system, allowing the supply chain to operate at minimum delay. Trailer yard inventories and yard tractor dispatch can also be accomplished through RF Mobile Data. Some systems even provide graphical mapping for LTL carriers [13]. RF provides vital real-time data, allowing the WMS/TMS to address and to correct problems whenever and wherever they occur throughout the extended supply chain correction [14]. Besides RF, another method of wireless communication that can perform data exchange in an integrated system is two-dimensional coding (2-D), which give the ability to attach data files to physical objects [16]. This allows firms to track both an items location and its storage characteristics at the same time. The 2-D barcode is used in conjunction with PDF417 technology. A single PDF417 symbol carries up to 1.1 kilobytes of machine-readable data and it can contain biometric data files such as photographs, fingerprints, and signatures, as well as text, numeric and graphics. Thus, a 2-D barcode can store information on the items value, size, and typical demand pattern (seasonal or regular), facilitating real-time decision making on rerouting and order fulfillment. In addition to macro-operational improvements, an integrated WMS/TMS system can generate improvements on the process level, through implementations such as a Cross Dock Tracking System. As discussed in the next section, a Cross Dock Tracking system reduces or eliminates the frequency of misloads, fines due to overweight loads, and reloads. Implementing dock operations also results in savings in paperwork. By eliminating load tallies and load manifests, an integrated system saves thousands of dollars labor and form costs which can be estimated around $50,000 per year for a single location [17]. In addition, the implementation of an integrated system that contains cross-dock tracking operations can assist the company in measuring production. Real-time information on shipment weight, number of pallets, and total handling time can be examined for every door or for dock production as a whole. Decision-support systems are also evolving as part of the integrated system. Because they examine the extended supply chain, integrated systems have the ability to perform high-speed availability checks at the time of order entryto check against stocks, allocate orders, and set reliable confirmation dates [13]. Based on forecasted demand, the company can also calculate order due dates at each level of the extended supply chain. Companies can manage multiple transportation modes, multiple carriers and tariffs, and alternative routes to consolidate orders. Handling capacities and time window constraints are also considered to allow companies to optimize their shipment schedule. Built in optimization software can aid companies in optimizing transportation plans by combining the large volume of data from various accounts into integrated and optimal solutions that would be impossible for an analysis team to reach by hand. Such optimal plans can be found by leveraging opportunities for continuous moves for TL, using pooling points for LTL, and taking advantage of time windows for shipment aggregation [12]. 4 Integrated WMS/TMS and the Perfect Order The effects of implementing an integrated WMS/TMS system can be partially quantified through an examination of its impact on a companys ability to consistently produce the Perfect Order. Copacino [18] defines the Perfect Order as an order that proceeds through every step of the order management process without fault, exception handling, or intervention. The order management process consists of order entry, credit clearance, inventory availability, accurate picking, on-time delivery, correct invoicing, and payment without deductions. Since it

examines every step of the order fulfillment process, Perfect Order is a sound measure of logistics effectiveness and customer service. One of the ways that an integrated WMS/TMS system is likely to impact the Perfect Order is by the reduction or elimination of misloads through a more efficient Cross Dock Tracking System. Currently, it is a fact in the logistics world that a small number of shipments are misloaded every day. While this number is rarely recorded as an accurate percentage of total shipments handled, a misload rate of two percent is accepted as a conservative industry estimate [17]. If this assumed two percent of misloads could be eliminated, the companys Perfect Order measure would be increased by two percent. In actuality, the savings may be even greater, depending on the individual companys misload rate. Synergistic Systems corporate web page describes the impact of an integrated system on the Perfect Order. The example given illustrates how a carrier having $50,000,000 revenue per year and 2% misleads can save up to $1,515,000 or 3 % of total original revenue through the implementation of a WMS/TMS. [17]. Due to the misload rate, the carrier has a yearly unused capacity of $1,000,000 of misloaded freighthauling it for a loss. By using an operating ratio of 95%, Synergistic calculates that $950,000 of these load dollars could be saved through the implementation of an integrated WMS/TMS. In addition to these costs savings, a decrease in the number of misloads would also lead to direct profit benefits. Again using a 95% ratio, Synergistic calculates that the $1,000,000 in potential additional capacity could yield $50,000 in direct profit plus $200,000 in overhead. In addition, Synergistic calculates that an additional $315,000 in shipment handling cost could be saved, raising the additional profit total to $565,000 per year and the total positive cash flow from cost savings and direct profit margin to 1,515,000 [17]. An integrated WMS/TMS system can also improve the Perfect Order ratio by the reduction of reloads through the interactive Cross Dock Tracking Program. The system monitors where the freight is being loaded on the trailer and issues warnings if one area of the trailer or the trailer as a whole is over the predetermined weight limit. This warning saves costs resulting from trailer reloading and fines for overweight trailers. A more efficient tracking program can also aid in freight bill corrections and assist in the reweigh process through automatic generation of corrective notices for shipments over the bill weight [17]. In addition to direct cost-savings, an increased Perfect Order measure will increase the companys reliability, resulting in increased customer satisfaction and retention. Even a 2% misload ratio means that shipments are consistently being misloaded, resulting in a lower customer service level and significantly increasing the risk of a lost customer. The cost of losing a customer can be especially significant if it involves one of a companys key accounts. For this reason firms also need to add the cost of a lost customer into the cost savings resulting from an improved Perfect Order measure [17]. 5 Conclusions and Future Research The current research has revealed potential for improvement resulting from an integrated WMS/TMS system. Future research directions need to address in detail the mechanisms necessary for this improvement, including process level improvements, metrics to measure improvement, and implementation issues. Process improvements to current warehousing and transportation practices are necessary for the full realization of the benefits of an integrated system. Improving trailer pick-up/drop-off visibility and speed is a major benefit for the transportation industry, as drivers typically list wait time as one of the primary factors for switching jobs. The potential impacts of the WMS and TMS integration on a virtual warehouse need to be identified. The virtual warehouse relies on intelligent tracking technologies and real time decision algorithms to provide operating efficiencies and global inventory visibility comparable to that achieved in a single-class warehouse [19]. Some questions that need to be addressed include, but are not limited to, the following:

When would it be less expensive to transfer inventory to prevent a stock out, rather than just incur the stock out?

When would it be less expensive to transfer the order and ship from another location, rather than just incur the stock out?

When would it be less expensive to split the order and ship from two locations, rather than just incur the stock out?

Under what circumstances (if any) should inventory in transit be diverted? In order to quantify operational improvements resulting from the implementation of an integrated system, it will be necessary to establish a set of metrics to ensure that overall supply chain costs are reduced, rather than simply optimizing the various components of the supply chain individually. Potential issues to be considered include the coordination of replenishment when a single vendor supplies multiple SKUs so that full truckload trucking can be utilized. When a pull system is implemented, initially order quantities are smaller due to existing safety stock. This may result in less than full load trucking. However, assuming demand does not decrease, as soon as the system exhausts the safety stock the system should reach equilibrium and revert back to full truckload trucking. Finally, all potential implementation issues of the proposed integrated WMS and TMS need to be addressed. In order to plan the efficient flow of goods from their origin to their destination (often from production to consumption), supply chain planners typically are concerned with two different planning horizons: strategic (long term) and operational (short term). While strategic planning concentrates on the corporate side of planning the flow of products across the supply chain, execution planning is responsible for making strategic plans into reality. Acknowledgements This research was supported by Global Concepts, Inc. (www.gclogistics.com) through The Logistics Institute (www.tli.uark.edu) at the University of Arkansas. References 1. Ganeshan, R. and Harrison, T.P., 1995, An introduction to supply chain management,

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Integrating the Warehousing and Transportation Functions of the Supply ChainScott J. Mason, P. Mauricio RiberaJennifer A. FarrisRandall G. KirkAbstract1Introduction2Warehouse and Transportation Management Systems3Integration of WMS and TMS4Integrated WMS/TMS and the Perfect Order5Conclusions and Future ResearchAcknowledgementsReferences