Cut-throat competition in industries has driven companies to find ways to reduce costs while increasing efficiency.  To accomplish this, most companies have skillfully endeavored to streamline Sales, Operations Planning, Forecasting, Inventory Management, and Logistics.

One area that has still not grabbed industry’s attention is out-bound Supply Chain Management–from packaging to final delivery.  Companies generally neglect Supply Chain simply because they do not consider it their core competency.

Significant Cost Reduction in the Supply Chain can be achieved by focusing on 2 main cost categories:

1. Warehousing Costs
2. Transportation Costs

Warehousing and Transportation represent a significant portion of the total Logistics costs.  Implementing improvement programs, without any significant capital investments, can enable 20-50% cost saving in Warehousing, 40% in Transportation costs, flexibility, and better service.

Supply Chain Cost Reduction in Transportation and Warehousing has vast potential, not only in terms of costs, but also Process Improvement using Lean Six Sigma (LSS) techniques.

The approach to Supply Chain Cost Reduction in Warehousing encompasses 3 phases:

1. Set the Baseline
2. Determine the Gap
3. Implement Lean Six Sigma (LSS)

Meticulous and persistent application of Lean Management and Six Sigma techniques is at the core of reshaping Warehousing Operations and eradicating sources of waste, variability, and inflexibility.  This article is an overview of the 6 building blocks used in Implementing Lean Six Sigma (LSS)—the 3^rd phase of the approach to Supply Chain Cost Reduction in Warehousing:

1. Business Processes
2. People
3. Performance Management
4. Third Party Interactions
5. Layout
6. Ownership

Let us dive a little deeper into some of the building blocks.

Business Processes

Business Processes present a huge opportunity for improvement by eliminating redundancies and sources of waste in Warehouse operations (e.g., unnecessary motion or double-handling in Manufacturing).  Each source of waste represents extra costs and inflexibility that can be reduced or eliminated.

Business Process Improvement can help reduce:

• Handling steps
• Motion
• Transportation
• Space requirements
• Effort
• Time spent

People

This building block of Implementing Lean Six Sigma aims at avoiding overstaffing of full-time employees and at the same time maintaining a well-trained, efficient workforce.

Streamlining this building block leverages the following benefits to organizations:

• Refined Recruitment process reduces Employee Turnover.
• Facilities can more closely match on-site staffing to demand by reducing notice periods.
• Efficiency can be raised by about 15% through regular training.
• Overstaffing of full-time employees can be avoided.
• Productivity can be improved by 5-10% by focusing on appropriate facets of Performance during training.

Performance Management

This building block aims at using existing Performance Management levers to improve Employee Performance through morale boosting and awareness exercises.  A laser-focus on the performance element helps the leadership achieve the following benefits:

• Constant reminders and display of current performance give employees a sense of competition and drive.
• Quick daily discussions highlight the significance of good performance and helps employees focus on essential aspects of their work.
• Productivity is improved up to 20% by linking pay to performance.
• Real-time feedback supports pay-related performance.
• Measuring and rewarding the “softer” elements has long-term benefits.
• Recognizing employee of the month can increase staff satisfaction.

Given the existing industry cost and performance demands, wasteful or unpredictable Warehouse operations lose more than money.  This can do rapid and permanent harm to a company’s reputation with customers since distribution is the logistical interface with the customer.

Improving Warehouse Operations is a significant area not only for Cost Reduction, but also a source of refining Customer Value Proposition.

Interested in learning more about Supply Chain Cost Reduction in Warehousing and Lean Six Sigma?  You can download an editable PowerPoint on Supply Chain Cost Reduction: Warehousing here on the Flevy documents marketplace.

Want to Achieve Excellence in Supply Chain Management (SCM)?

Gain the knowledge and develop the expertise to become an expert in Supply Chain Management (SCM).  Our frameworks are based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts.  Click here for full details.

Supply Chain Management (SCM) is the design, planning, execution, control, and monitoring of Supply Chain activities.  It also captures the management of the flow of goods and services. 

In February of 2020, COVID-19 disrupted—and in many cases halted—global Supply Chains, revealing just how fragile they have become.  By April, many countries experienced declines of over 40% in domestic and international trade. 

COVID-19 has likewise changed how Supply Chain Executives approach and think about SCM.  In the pre-COVID-19 era of globalization, the objective was to be Lean and Cost-effective. In the post-COVID-19 world, companies must now focus on making their Supply Chains Resilient, Agile, and Smart.  Additional trends include Digitization, Sustainability, and Manufacturing Reshoring.

Learn about our Supply Chain Management (SCM) Best Practice Frameworks here.

Do You Find Value in This Framework?

You can download in-depth presentations on this and hundreds of similar business frameworks from the FlevyPro Library.  FlevyPro is trusted and utilized by 1000s of management consultants and corporate executives.  Here’s what some have to say:

“My FlevyPro subscription provides me with the most popular frameworks and decks in demand in today’s market.  They not only augment my existing consulting and coaching offerings and delivery, but also keep me abreast of the latest trends, inspire new products and service offerings for my practice, and educate me in a fraction of the time and money of other solutions.  I strongly recommend FlevyPro to any consultant serious about success.”

– Bill Branson, Founder at Strategic Business Architects

“As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power.  For us, it is an invaluable resource to increase our impact and value.”

– David Coloma, Consulting Area Manager at Cynertia Consulting

“FlevyPro has been a brilliant resource for me, as an independent growth consultant, to access a vast knowledge bank of presentations to support my work with clients. In terms of RoI, the value I received from the very first presentation I downloaded paid for my subscription many times over!  The quality of the decks available allows me to punch way above my weight – it’s like having the resources of a Big 4 consultancy at your fingertips at a microscopic fraction of the overhead.”

– Roderick Cameron, Founding Partner at SGFE Ltd

Warehousing costs at most firms are extraordinarily higher than they ought to be.  Across the world, organizations spend around €300 billion annually on Warehouse Management.  With the boom in online retail stores and the increasing complexity of Supply Chain Management, this spending is going to surge further.

The leadership at these organizations understands that they should spend less on Warehousing operations, but is not aware of the real costs associated with it.  Most leaders are unable to tell how much is their human resources cost per facility.

Lack of appreciation of true Warehousing operations costs is one of the main reasons for failure of most Business Transformation programs.  Without this knowledge, the leadership is unable to comprehend where the improvement areas lie and how much value creation can be achieved from those.

Ascertaining these costs warrants a clear approach, which many organizations lack.  Most firms inquire about their operational costs from 3^rd party Logistics (3PL) providers—by soliciting requests for quotations (RFQs).  However, this does not give an idea of what these principal activities really cost.  The most common approaches to Warehouse costing include:

• Benchmarking
• Cleansheet Analysis

Benchmarking

The Benchmarking method uses a top-down approach to analyze costs based on industry benchmarks.  However, accessibility of benchmarks at lower levels is hard to access, since benchmarks available for comparison are predominantly at high levels—e.g., Total Warehouse Cost as a proportion of Cost of Goods Sold.  Industry Benchmarking fails to take into consideration distinct product or service offerings.

Cleansheet Analysis

Cleansheet (or a Bottom-up Analysis) is a more comprehensive method to estimate Warehousing costs.  It is a numerical approach to ascertain precise costs of critical components of Warehousing operations, including facility spread out, workforce, and equipment.  This method facilitates in understanding where the cost exceeds and how it can be eliminated.

The focus of the Cleansheet Analysis is on determining the lowest possible cost of each major element, and comparing it with the actual cost being paid.  Identifying the lowest costs of major elements allows the organization to determine the most problematic areas and confront major cost inconsistencies.

The Cleansheet Analysis comprises of 3 main steps:

1. Ascertain Critical Parameters
2. Perform Bottom-up Calculations
3. Determine Ideal Throughput Metrics

Let’s dig a bit deeper into the initial step.

Ascertain Critical Parameters

The first step of the Cleansheet Analysis entails scoping the Warehousing facility’s configuration, work, team, volumes, and orders.  Specifically, this includes evaluating:

• The workforce, accountability distribution, workloads.
• The actual warehouse activity levels.
• The volumes.
• The volume drivers—number of SKUs, order patterns, order lines.

Interested in learning more about the steps to using a Cleansheet Analysis?  You can download an editable PowerPoint presentation on Warehouse Costing: Cleansheet Analysis here on the Flevy documents marketplace.

Do You Find Value in This Framework?

You can download in-depth presentations on this and hundreds of similar business frameworks from the FlevyPro Library. FlevyPro is trusted and utilized by 1000s of management consultants and corporate executives. Here’s what some have to say:

“My FlevyPro subscription provides me with the most popular frameworks and decks in demand in today’s market. They not only augment my existing consulting and coaching offerings and delivery, but also keep me abreast of the latest trends, inspire new products and service offerings for my practice, and educate me in a fraction of the time and money of other solutions. I strongly recommend FlevyPro to any consultant serious about success.”

– Bill Branson, Founder at Strategic Business Architects

“As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power. For us, it is an invaluable resource to increase our impact and value.”

– David Coloma, Consulting Area Manager at Cynertia Consulting

“As a small business owner, the resource material available from FlevyPro has proven to be invaluable. The ability to search for material on demand based our project events and client requirements was great for me and proved very beneficial to my clients. Importantly, being able to easily edit and tailor the material for specific purposes helped us to make presentations, knowledge sharing, and toolkit development, which formed part of the overall program collateral. While FlevyPro contains resource material that any consultancy, project or delivery firm must have, it is an essential part of a small firm or independent consultant’s toolbox.”

– Michael Duff, Managing Director at Change Strategy (UK)

Companies looking to improve efficiency and reduce costs can gain significant ground in the Supply Chain Management function by incorporating Lean Management and Six Sigma techniques.

Reason this area has gone under the radar is that companies do not consider Supply Chain to be their core competency.

Not only Warehousing but Transportation also has almost the same potential in terms of opportunities for Cost Reduction and Process Improvement.  The approach to Transportation Costs Reduction, though, is different to that of Supply Chain Cost Reduction in Warehousing.  This is in part due to the complexity in Transportation Costs, as the costs come from numerous widely distributed individual operations every year.

The approach to Supply Chain Cost Reduction in Transportation encompasses 2 phases:

1. Understand the Baseline
2. Identify and Implement Opportunities

Let us delve a little deeper into the 2 phases.

1. Understand the Baseline

Improvement in Transportation operations is hindered, in most cases, by enormous variability in operations, diverse service levels being demanded by various customers, and a multitude of transport providers delivering services in a variety of ways.

Transportation Costs of between 20-30% can be saved by compiling a complete perspective of the overall Transportation operations of an organization.  The evaluation will also reveal essential service categories that have a skewed effect on Cost.

2. Identify and Implement Opportunities

Identification of the Cost Drivers is imperative for the companies to develop a systematic approach to Transportation Cost Reduction.  This systematic approach involves observing 4 main levers of Cost Optimization opportunities:

1. Compliance with Contracted Price
2. Negotiated Price
3. Contract Terms
4. Customer Breakpoints and Behavioral Changes

The 4 levers of Cost Reductions help in countering the issues impacting Transportation Costs and enabling significant savings.

Significant Cost Reductions can be gained by identifying mutual benefits and risks for both companies and suppliers in addition to understanding customer breakpoints that enable Customer Centric Design.

Let us consider a few instances where Cost Reduction can have a quick impact.

• Companies, often, have to pay substantial fuel surcharges for waiting time or late payments—caused by variance in actual delivery patterns and the delivery pattern specified in the contract.
• Suppliers usually charge a higher rate to compensate for inefficiencies in their operational structure. Understanding those inefficiencies helps identify significant savings potential.
• Logistics Service Providers either increase their rates or add fuel surcharges in order to protect themselves from the effect of fluctuating fuel prices. A fixed rate benefits the customer when fuel prices go up, but creates needless high fuel bills when prices are down.
• Ordering habits of certain customers add to the Transportation Costs. For example, unknowingly ordering early next-day deliveries, without an absolute necessity for it, causes significant (20% in some cases) extra cost than a delivery at noon.  A 24-hour delivery time costs even less than the noon delivery.

Interested in learning more about the phases and cost drivers of Supply Chain Cost Reduction in Transportation?  You can download an editable PowerPoint on Supply Chain Cost Reduction: Transportation here on the Flevy documents marketplace.

Want to Achieve Excellence in Supply Chain Management (SCM)?

Gain the knowledge and develop the expertise to become an expert in Supply Chain Management (SCM). Our frameworks are based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. Click here for full details.

Supply Chain Management (SCM) is the design, planning, execution, control, and monitoring of Supply Chain activities. It also captures the management of the flow of goods and services.

In February of 2020, COVID-19 disrupted—and in many cases halted—global Supply Chains, revealing just how fragile they have become. By April, many countries experienced declines of over 40% in domestic and international trade.

COVID-19 has likewise changed how Supply Chain Executives approach and think about SCM. In the pre-COVID-19 era of globalization, the objective was to be Lean and Cost-effective. In the post-COVID-19 world, companies must now focus on making their Supply Chains Resilient, Agile, and Smart. Additional trends include Digitization, Sustainability, and Manufacturing Reshoring.

Learn about our Supply Chain Management (SCM) Best Practice Frameworks here.

Do You Find Value in This Framework?

You can download in-depth presentations on this and hundreds of similar business frameworks from the FlevyPro Library.  FlevyPro is trusted and utilized by 1000s of management consultants and corporate executives. Here’s what some have to say:

“My FlevyPro subscription provides me with the most popular frameworks and decks in demand in today’s market. They not only augment my existing consulting and coaching offerings and delivery, but also keep me abreast of the latest trends, inspire new products and service offerings for my practice, and educate me in a fraction of the time and money of other solutions. I strongly recommend FlevyPro to any consultant serious about success.”

– Bill Branson, Founder at Strategic Business Architects

“As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power. For us, it is an invaluable resource to increase our impact and value.”

– David Coloma, Consulting Area Manager at Cynertia Consulting

“FlevyPro has been a brilliant resource for me, as an independent growth consultant, to access a vast knowledge bank of presentations to support my work with clients. In terms of RoI, the value I received from the very first presentation I downloaded paid for my subscription many times over! The quality of the decks available allows me to punch way above my weight – it’s like having the resources of a Big 4 consultancy at your fingertips at a microscopic fraction of the overhead.”

– Roderick Cameron, Founding Partner at SGFE Ltd

Shortage of labor, intensified demand from e-tailers (online retailers), and technological disruption is forcing organizations in the Logistics and Warehousing industry to embrace technology, particularly Automation.

An investment in automating the picking, packing, sorting, storing, and shipping items can yield high returns for organizations.  Warehouses that will sort out the dynamics of e-commerce, select the ideal technology to implement, and eliminate uncertainties in their supplier contracts will outpace others.

Automation is facilitating the Warehousing operations predominantly by:

• Assisting the movement of goods.
• Improving the handling of goods.

In these two categories, there are 10 technologies that are fast disrupting the Supply Chain function and creating a breakthrough for warehouses.  These include:

1. Multi-shuttle System
2. Optical Recognition
3. Conveyor Connection
4. Warehouse Management Systems
5. Smart Storage
6. 3D Printing
7. Swarm AGV Robots
8. Analytics & Algorithms
9. Smart Glasses
10. Picking Robots

Let’s discuss a few of these disruptive technologies in detail.

Multi-shuttle System

Multi-shuttle systems (MSS) are employed to store and retrieve goods automatically—using automated storage and retrieval system (AS/RS).  This system is able to transport goods 3 dimensionally (on pallets), and is instrumental in enhancing the throughput, flexibility and efficiency levels.

MSS consists of 3 modules, coordinated by a software module: a Shuttle car powered by power caps for 24-hour operations and moved by powerful motors, high-performance vertical lifts, and a special carrier to move the shuttle car to the exact location.  Communication in the multilevel systems’ carrier and shuttles is managed by radio links, whereas the movement is controlled by an integrated control system.

Multilevel Shuttle Storage System is ideal for cold storage, buffer storage, dispatching warehouses, commissioning warehouses, supply and distribution centers, and factories.

MSS offers a number of benefits, e.g.:

• High item storage and retrieval velocity.
• Optimum use of building space.
• High storage density.
• Ability to be retrofitted in existing warehouses.

Optical Recognition

Optical Recognition and Sensor technology expedites processes and increases productivity.  This technology is at the foundation of IoT, smart cities, automobiles and laser-guided vehicles, smartphones, wearable technologies, drones, barcode readers, and more.

Optical Recognition devices use a light source to read characters and barcodes.  They then convert these characters into digital data.  Optical Recognition devices scan items.  At times, this scanning is done on 6 axes.  The character recognition software then relates this image to the shapes of individual characters.

Optical recognition devices today use sensors to detect and respond to a specified input—light, sound, motion, pressure, temperature.  Once an input is received, a sensor either produces a resulting output—in the form of a light or alarm—or forward the information received to a network for processing.

Optical recognition sensors facilitate in:

• Accelerating and improving processes, inspecting parts for error checking, and quality monitoring.
• Delivering real-time data to make better decisions.
• Handling repetitive and hazardous tasks and making workplaces safer
• Freeing up people to manage more complex endeavors.
• Slashing energy wastage and creating connected, smart factories.

Conveyor Connection

Connected Conveyor Systems are useful in transporting heavy or bulky materials.  These systems allow quick and efficient transport of a variety of materials (e.g. totes, cartons) in different warehouse configurations.  Advanced conveyor systems and connections perform various material handling requirements including accumulation, transportation, diverting, merging, and sorting products.

Interested in learning more about the other technologies reshaping the warehousing operations?  You can download an editable PowerPoint presentation on Warehouse Automation: 10 Technologies here on the Flevy documents marketplace.

Do You Find Value in This Framework?

You can download in-depth presentations on this and hundreds of similar business frameworks from the FlevyPro Library. FlevyPro is trusted and utilized by 1000s of management consultants and corporate executives. Here’s what some have to say:

“My FlevyPro subscription provides me with the most popular frameworks and decks in demand in today’s market. They not only augment my existing consulting and coaching offerings and delivery, but also keep me abreast of the latest trends, inspire new products and service offerings for my practice, and educate me in a fraction of the time and money of other solutions. I strongly recommend FlevyPro to any consultant serious about success.”

– Bill Branson, Founder at Strategic Business Architects

“As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power. For us, it is an invaluable resource to increase our impact and value.”

– David Coloma, Consulting Area Manager at Cynertia Consulting

“As a small business owner, the resource material available from FlevyPro has proven to be invaluable. The ability to search for material on demand based our project events and client requirements was great for me and proved very beneficial to my clients. Importantly, being able to easily edit and tailor the material for specific purposes helped us to make presentations, knowledge sharing, and toolkit development, which formed part of the overall program collateral. While FlevyPro contains resource material that any consultancy, project or delivery firm must have, it is an essential part of a small firm or independent consultant’s toolbox.”

– Michael Duff, Managing Director at Change Strategy (UK)

Supply chain management across industries is revolutionizing at a rapid pace by technology.  By implementing technology systems, supply chain organizations aspire to eliminate waste, meet customers’ needs at reasonable costs, and ensure profitability.  Enterprise Resource Planning systems facilitate in processing unstructured data at an aggregated level.  However, at workflow or micro level the data produced through ERPs needs to be further refined to understand costs.

Supply chain experts need to look at their unstructured data and understand the cost of offering a product; know which product mix they should promote; and gauge the impact of service levels on transportation costs, profits, and pricing strategy.

Supply Chain Executives can use the Cost-to-Serve (CTS) Analysis approach to control distribution costs, identify negative-margin products, and prevent profit leakages.  CTS Analysis affords the organizations the means to identify the total cost of serving customers—including all the costs in a product’s value chain (from raw material to delivery)—at the product as well as customer levels.  The approach helps leaders split and evaluate individual customers, geographies, products, product families, or combinations of products / customers.

The Cost-to-Serve Analysis can be undertaken to identify costs related to Supply Chains, Logistics, Distribution, Warehousing, or Transportation.  CTSA allocates indirect cost to products—overhead or fixed costs that are not easily and directly attributable to a single order, shipment, or activity.

The CTS model for costing entails detailed modeling of all the value and non-value added activities in the process.  The approach is more precise than other methods in determining “what-if” budgets, as it accounts for all the activities and link them with their relevant cost pools.  CTS employs an activity-based modelling algorithm—which segregates the entire supply chain into multiple tasks while calculating the costs at every task—to help the supply chain practitioners calculate costs at various levels.

The CTS Framework entails 5 fundamental steps:

1. Obtain Buy-in from Key Stakeholders
2. Conduct Cost Categorization
3. Determine per Unit Cost Breakdown
4. Develop Classification Matrices
5. Make Joint Decisions

Let’s delve deeper into the first 2 steps of the CTS Framework.

1. Obtain Buy-in from Key Stakeholders

The first step to implement Cost-to-Serve Framework involves getting across-the-board agreement and stakeholder buy-in.  The decision to calculate the impact of cost to serve on revenue entails engagement and collaboration from multiple departments in a company.  Multiple cost centers work in partnership across a value chain and thus profit and loss responsibility cannot be attached to a specific unit.

For instance, a decision to trim down the costs to serve a customer (or various customers) has to be agreed upon by stakeholders from the:

• Sales and marketing department to calculate the impact of service level agreements.
• Logistics function to calculate the cost impact.
• Go-to-market Strategy to ensure alignment with Corporate Strategy
• Warehousing unit to ensure resource planning and allocation.

2. Conduct Cost Categorization

The 2^nd step of the Cost-to-Serve Framework involves categorization of costs associated with the entire supply chain.  Supply chains typically have various cost centers (or functions): e.g., Procurement, Manufacturing, Warehousing, and Logistics.  These cost centers further have multiple processes with costs associated with all of them.  CTS requires top-down estimation of costs at the process and activity level and then aggregate those back to the cost center level.

This categorization of costs across the various functions of the supply chain and their associated processes facilitates in accurate calculation and obtaining estimates at the micro level.

Interested in learning more about the other steps of the Cost-to-Serve Framework?  You can download an editable PowerPoint presentation on Cost-to-Serve Analysis here on the Flevy documents marketplace.

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