Manufacturing and maintenance operations have been dramatically improved using lean techniques: eliminating waste, inflexibility and variability in their systems and reducing costs by up to 50 per cent in the process. Yet the application of the same lean techniques in warehouse operations is unheard of.
Today, things are changing. The supply chain managers of leading organizations now recognise that lean techniques can be applied successfully in a warehouse context, and that the effect of such an approach is dramatic. Companies that have run successful lean programs report cost savings in their warehouse operations of 20 to 40 per cent. In some industries, such savings could be as much as 0.5 to one per cent of total sales. But the benefits of leaner warehouse operations do not stop there. These same companies also enjoy increased flexibility and substantially improved levels of service, all without any significant capital investment.
The first key challenge in optimizing warehouse operations is that there is no ”standard” – the operations tend to be as diverse as the products stored within them. As a consequence, it has been difficult for best practice to be identified and applied across a broad variety of settings, and warehouse managers struggle with their specialist needs as they try to improve their lacklustre performance.
Now there is a new tool available to help supply chain managers compare just how efficient their warehouse operations are. Working with the Institute for Materials Handling and Logistics Systems (IFL) of the University of Karlsruhe, McKinsey has developed the first comprehensive technique for performance measurement across all types of warehouse. The Distribution Centre Reference Model (DCRM) takes a multi-level approach to warehouse assessment, allowing detailed analysis of the individual processes and tasks that make up warehousing operations. The resulting benchmark database is a unique resource, describing warehouse performance with rigor and detail.
Since November 2006, the DCRM has been used as part of the improvement approach in more than 20 different distribution centres in Europe, the US and South Africa. Even the largest, most refined operations offered substantial improvement potential. Compared to best practice benchmarks, in the substantial majority of the centres we analyzed, the identified cost reduction opportunities were in the order of 30 to 50 per cent, and even the very best had a 10 to 15 per cent improvement potential.
We found that the cumulative effect of dozens of slightly sub-optimal processes was responsible for the performance gap. In the facilities examined, we saw consistent failures to optimise performance in each of six fundamental building blocks of performance:
Processes: The same sources of waste that the lean approach seeks to eliminate in the manufacturing context (unnecessary motion or double handling for example) account for a high proportion of unnecessary warehousing costs, and introduce critical inflexibility.
People: Warehouse operations are labour intensive and it is common for facilities to run a personnel model that is insufficiently flexible to respond to fluctuations in demand.
Performance management: Warehouses rarely implement any kind of performance or continuous improvement culture. When they do collect performance data, it is used purely for reporting, not to improve performance of the operations.
Interaction with the customer: The warehouse operating model is often not designed to reflect the service level requirements of its internal or external customers. Warehouses are often unable to flex their operations in response to predictable fluctuations in customer demand, leaving them either overstaffed or underperforming.
Inflexibility of layout/systems. Many facilities opt for a ”one size fits all” approach to layout, rather than segmenting their assets according to different product types and customer requirements. Managers are also unwilling to alter facility layouts as demand patterns change.
Ownership impact. The outsourcing of warehouses to third party operators is a common strategy for companies that do not consider warehousing to be a core competence. A common result of such deals, however, is the transfer of inefficient processes to a new owner, while cost plus contract terms seldom create an imperative for improvement on the part of the service provider.
While the poor performance of many distribution centres should be worrying for supply chain managers everywhere, the good news is that relatively simple steps can close much of the gap. In one European non-food retail distribution warehouse for example, we found performance 42 per cent lower than benchmark levels. Intensive examination of operating practices at the facility quickly identified a set of changes that could be immediately implemented and could be expected to halve that gap.
At the heart of this type of transformation activity is the rigorous and relentless application of lean techniques to eliminate sources of waste, variability and inflexibility. Operations are observed, problems identified and brainstorming sessions produce possible solutions. Most of these solutions are extremely simple, pragmatic activities that require little or no financial investment. Instead, improvement is delivered by focusing on each of five fundamental building blocks of performance (change of ownership usually falls outside the scope of an improvement project). The examples below are typical, taken from a number of different projects worldwide.
For many orders, picking and packing processes can be combined – significantly reducing the number of handling steps, motion, transportation and space requirements.
Receiving processes often include intensive breakdown of pallets, which is rarely well coordinated. By optimizing the sequence of actions for pallet breakdown and introducing organized work places, effort can be cut by half.
Pickers in one facility were spending two minutes between picks waiting for new lists to be printed. By introducing an automated system that produced a new list each time one was taken, pickers could always expect their next pick list to be available. In other facilities, simply ensuring that there were always enough picking pallets available reduced expensive operator idle time.
Documentation and standardisation are a hugely powerful part of process improvement. Once best practices have been developed, clear standard operating procedures help to ensure that all staff adopt optimised processes.
Workload requirements in warehouse facilities can vary by as much as 50 per cent day to day. Around half of this variation can be predicted in many facilities by forecasting based on historical data, but conventional approaches to workforce flexibility – either none at all or flexibility using notice periods of several weeks – simply cannot respond to these rapid changes in demand. As a result, facilities are often overstaffed in order to guarantee performance.
By reducing the notice period for shift schedules to one or two days, facilities can ensure that their on-site staffing matches real demand much more closely. Efficiency increases of up to 15 per cent are possible using this approach. Some facilities have achieved even better results using a super-flex temporary workforce, often students on vacation work. These super-flex workers can be called by SMS message with only a few hours notice, allowing the facility to respond on the same day to unexpected demand.
Warehouse workforces are often relatively low skilled and can suffer from high turnover rates. As a consequence, employers often attempt to minimise recruitment and training investment in order to keep costs down. In our experience, improved training can deliver productivity improvements of five to 10 per cent. Successful training strategies must be regular and continuous, and must focus on specific aspects of each employee”s performance, encouraging them to adopt established best practices.
Most modern warehouses collect detailed data on the performance of individual employees automatically as part of their standard warehouse management systems. Unfortunately, few exploit this data effectively to motivate and improve employee performance.
Just demonstrating ongoing performance in a clear, accessible way can deliver immediate performance improvements. A notice board showing the relative performance of different pick teams, for example, creates internal competition that can dive performance up.
High performing facilities supplement visible performance metrics with daily discussion of historical performance and upcoming expectations. A five-minute discussion at the beginning of each shift reinforces the importance of good performance and helps staff to concentrate on key aspects of their own activities.
The biggest improvements – increases in productivity of as much as 20 per cent – come from linking pay to performance. Such systems must be set up with care, to ensure that they reward quality as well as speed. Some facilities reinforce the impact of performance related pay with near real-time feedback, using pick-by-voice technology, say, to let staff know how well they are doing.
Measuring and rewarding the ”softer” aspects of performance can deliver powerful long-term benefits too. A visible, rewarded, ”employee of the month” scheme, for example, can have a positive impact on staff satisfaction. Measuring the number of improvement ideas implemented in a month or the effectiveness of suggestion schemes can help to foster a mindset of continuous improvement.
Warehouses are not islands. To operate efficiently, a facility must interact effectively with three groups: upstream with suppliers, downstream with internal and external customers and sideways with the wider organization.
Supplier relationships can be one of the most straightforward interactions to improve. Bad delivery accuracy can lead to congestion in the receiving area during peak times, for example, while during several hours of the day the area is empty. By assigning time-windows for delivery and clear consequences for missing the window (not receiving the truck, for example), volume flow can be levelled and the workforce utilised better.
Working with suppliers
Working with suppliers can also ensure that goods arrive in the right order and in the right form of packaging for direct storage. This can substantially reduce labour in the receiving of goods. Also, an optimum loading bay configuration for the types of vehicle used for delivery reduces double handling.
While it is not always possible to dictate delivery schedules or strategies to customers, leading facilities are beginning to exploit co-operative working methods to develop mutually beneficial least-cost approaches. Improved delivery performance and high customer confidence help to build the trust essential for this kind of activity. On this basis, some are introducing variable pricing and service levels to encourage customers to order at the most cost-effective quantities and delivery frequencies, with higher levels of service available for a price premium.
Trust is also an essential pre-cursor to improved relationships with the wider organization. One facility suffered a significant administrative overhead caused by sales staff calling to check the progress of express orders. By bringing the sales staff to the facility and demonstrating the express picking and distribution process facility management was able to give the sales teams confidence that the system would work without their intervention.
Replacing fixed equipment with flexible, reconfigurable systems can have big benefits, while the penalties of inflexibility can be severe. One retailer that invested heavily in a highly automated warehouse facility found that changes in business needs meant that it had spare capacity in the facility. The retailer tried to resell this capacity to third parties, but the system was so inflexible that it was unable to fulfil the requirements of any of the interested organizations.
A common way to benefit from flexibility is to reorganise the facility layout to position items according to pick frequency. By placing fast and super-fast moving items right by the loading dock, walking distances and pick times can be reduced dramatically.
Warehouse operations deserve more attention from supply chain managers. Not only do they account for a significant fraction of overall supply chain cost, optimised warehouse performance can also have a large effect on the customer”s experience of the supply chain. The ability to deliver the products customers want, when they want them, in a cost effective manner could move warehousing from an expensive overhead to significant competitive differentiator. And achieving this kind of change does not require high capital investment or long lead times.
By reducing the notice period for shift schedules to one or two days, facilities can ensure that their on-site staffing matches real demand more closely
The biggest improvements – increases in productivity of as much as 20 per cent – come from linking pay to performance