Best practices in retail warehousing
Elsevier Food International Vol.9, Number 2, May 2006 Len Lewis
Although, definitions differ on what constitutes best practices, most agree it relates to reduction or elimination of costly picking errors, which have dropped precipitously as more retailers develop new processes and install more effective automated facilities and warehouse management systems.
In the Netherlands, Ahold’s Albert Heijn chain is changing to a sophisticated new warehouse management system from IMI (IndustriMatematik International), Swedish-based software company, for all its distribution centres. This enabled the chain to better handle products with a very short shelf life and to limit stock levels.
In January, Ahold’s Stop & Shop chain in the US opened a 1.3 million-square-foot automated facility in Freetown, Massachusetts which is capable of handling up to 400,000 cases of perishables and non-perishable products every day and servicing every one of the chain’s stores from Maine to Connecticut.
Mercadona in Spain, Edeka in Germany, SPAR in Austria, Kroger Supermarkets and CVS drug stores in the US, have partnered with Witron Logistics, Parkstein, Germany, on the development and installation of automated picking systems.
Eliminating errors
“State-of-the-art warehousing in Europe means full or partial automation because of several issues,” said Witron’s Ralf John. “Employees are hard to get and the need for ergonomic workspaces slows down the order picking process. Additionally, if a retailer is moving 400,000 pieces a day, an error rate of just 1.2 per cent is costly. Automation reduces errors to virtually zero and helps utilise the full height of the building,” he said.
Reduction of picking errors was the impetus for SPAR, which operates an automated central distribution centre in Wels, Austria for slow movers. “Full automation is very meaningful,” said Dieter Dornauer, head of logistics. “We want to automate as much as possible when and where it makes sense to do so.”
One of Witron’s most ambitious projects is Mercadona’s 180,000-square-metre warehouse in Ciempozuelos near Madrid. This is the first time that a fully automated picking system will be integrated into dry grocery sections as well as in fresh and frozen products. The facility is capable of picking up to 220,000 totes or cartons a day. “We are handling about 96 per cent of all products in this distribution centre,” said John, noting that a similar project at Edeka in Germany will be up and running by the end of 2006 or early in 2007.
“In the near future, best practices means automating the warehouse,” added Jaap de Hoop, head of logistics and warehousing for Schuitema in The Netherlands, noting that one of the chain’s five warehouses—a 40,000 square meter facility in Eindhoven, is fully automated right now.
Eventually other warehouses will be converted. But mechanizing a conventional facility can be difficult due to the volume of goods moving through them. “You can’t move things out and there;s usually not enough space to handle mechanized and conventional operations,” he said. At present, the company is building a new mechanized facility in Breda in Southwest Holland. “We are doing it in phases and it should be completed by the end of 2007 or the beginning of 2008.”
The system in place at Eindhoven has been particularly successful in reducing picking errors which are now down 30-40%. “In the new facility, mistakes should be near zero,” said de Hoop, noting that all of Schuitema’s facilities handle dry grocery, frozen and fresh products, which are then transported to the stores in combination trucks with three temperature zones.
Reviewing the basics
Not everyone is as enamoured with automation. “There is no silver bullet. People are spending an inappropriate amount of time looking at new technologies and systems before really looking at the fundamentals of warehousing and distribution,” according to John Hill, a principal in the consulting firm of Esynch, Toledo, Ohio. “No amount of technology will overcome the negative impact of a poor layout or flawed fundamental processes.”
Invariably, those looking for warehouse management systems can often make a few adjustments in layout and material flow before investment in new technology is really needed, according to Hill. “Quite simply, many distribution centres are not taking care of the basics.”
Although the food industry is noted for its cleanliness, other aspects of housekeeping provides a good insight into how well management is doing its job and what ownership employees have assumed for warehousing operations, according to Hill. “Look at whether the aisles are cluttered with pieces of shrink wrap, broken pallets and dirt. I’d say 30 per cent of the warehouses I visit could use a lesson in keeping house.”
“It’s hard to find good people and even harder to retain them – particularly in large metro areas. The real issue here is workforce management, getting people involved in the processes and assuming responsibility for executing certain tasks,” said Hill. Conversely, he believes companies must spend more time training warehouse personnel. ”I visit many places where procedures are ill-defined, poorly documented or not documented at all,” he said.
The best training usually comes from the existing workforce. “It builds team and spirit and it heightens the employee’s own perspective on his value to the company. However, the best programme is at Hershey Foods which has been rolling out massive distribution centres for the past three years. They have developed a self-paced instructional video for employees that covers every function in the warehouse. It gives people a chance to really learn what they’re doing and to understand each step required to perform different tasks.”
Taking on technology
After the people equation is solved, companies can then move on to best practices in technology, said Hill. “The best warehouses are the ones that have the technology to synchronise the flow of material with the flow of information. By that I mean every time a product moves, the information system needs to be updated on where the inventory is and what condition it’s in. This visibility of inventory enables a warehouse to do more with less. If I know where everything is, I don’t have to order safety stock.
“When it comes to best practices, the first thing I look for are tools that keep track of inventory in real time. But less than 40 per cent of warehouses are using barcodes let alone warehouse management systems. The major food companies do, but there are a lot of little guys in the world,” he said.
As to warehouses making the jump to RFID, he remarked: “Don’t hold your breath. I had a big argument with people at Wal-Mart. They are forcing small suppliers, who don’t even have the infrastructure or financial wherewithal to do barcoding, into a huge leap in technology. RFID will come. But there are serious technical hurdles and we’ve got to harmonise standards globally to make it work,” said Hill.
But RFID is not essential to having a state-of-the-art distribution centre. “To me, it means a facility with a system capable of receiving advance shipping notices on what product is coming in and when over a data link and matching the advance ship notice against inbound loads. It’s also having a system that provides feedback to carriers on appointment times or delivery windows with specific dock door assignments. You also need a labour scheduling system to minimise the amount of time people are standing around waiting for trucks to show up,” said Hill.
Domestic security
Interestingly, the US government’s focus on security issues has been the impetus for other best practices in warehousing, according to Hill. “The US Food and Drug Administration has ruled that companies have to maintain ‘discreet lot control’ throughout the supply chain in order to report on output in four-hour windows,” he said, noting that Homeland Security wants to know exactly when products are shipped and for companies to be able to trace the source of any product in the supply chain.
However, warehouse automation among major companies is focusing on efficiency and increased throughout rather than surveillance. This means high-speed sorting, systems that can unload products from pallets upon receipt and reload them onto conveyors for sorting at various consolidation points in the warehouse.
One of the most notable examples is Stop & Shop’s new distribution centre – a 155-acre facility the size of 21 Super Stop & Shop stores. It can receive up to 250 trucks per day and supplies approximately 150 stores with the capacity to handle another 100 units.
The chain, a unit of Netherlands-based Ahold, spent about US$20 million on materials handling equipment including 77 aisles of automated storage, resulting in a 40 per cent increase in volume. As a result, an outdated facility in Connecticut, which only handled produce had a paper-based pick system and made extensive use of forklifts, was closed.
In the drive for efficiency, the physical makeup of a facility or its location is a major factor. “I’m hearing more about combined or consolidated warehousing,” said Hill. “Particularly in a low-margin business like grocery, people are also looking at transportation costs and trying to figure out whether distribution centres are strategically located. They are using logistics network optimisation analyses to look at the demographics of their customers (retailers) and determine whether a facility should be closed or moved to achieve cost reductions without sacrificing service.”
Trading spaces
However, this doesn’t mean facilities are getting smaller. “But I do see less space devoted to inventory storage and more for value-added processing,” Hill noted. He cited the example of Wal-Mart, which likes pallets put together in a particular way so when they are shipped from a vendor to a Wal-Mart distribution centre, they can be moved directly to a truck for delivery to Wal-Mart stores. Additionally, the arrangement of products on the pallet needs to match the store’s planogramme. This enables employees to quickly replenish shelves as they move through the aisles without having to resort products, Hill said.
“I don’t like giant warehouses,” said SPAR’s Dieter Dornauer. “There’s a minimum and maximum size for an efficient warehouse. When you’re too big you lose efficiency because you have to spend more time on non-value creating work. I wouldn’t set up a warehouse that’s more than 120,000 square metres. When you start moving 80 to 90 million cases a year through a warehouse you’ve reached the upper level and it’s time to open up a second facility.”
Error free
Asked about best practices, Dornauer replied: “The best operation is where there are no mistakes. At the moment, our error rate is one for every 20,000 cases across our seven Austrian warehouses. Before our last test, it was even better – one error for every 27,000 cases. That’s about ten times better than if you were to do it manually,” he said. “We calculate that in Europe one mistake in warehouse picking costs us €20. This makes it easy to see how many months it takes to pay off the investment.”
Despite numerous issues, Dornauer is not enthusiastic about outsourcing warehouse operations to a third-party company. “You shouldn’t outsource what you think is your core competence and we believe that distribution of chilled food is ours. However, we do outsource frozens and our entire logistics programme – including fresh – in Slovenia. We’ll probably take back distribution of fresh product at some point. But right now we’d rather spend the money on outlets than warehouses,” he said.
Overall, Ralf John of Witron believes eastern Europe is about ten years away from widespread automated warehousing. “There’s less of a product selection so logistics are generally simpler,” he said, noting that the Czech Republic is one of the few places in eastern Europe where mechanised solutions are appearing. This is due to the higher standard of living and consumer demand for more products. “Lego in Denmark had five distribution centres across Europe. They are now centralising with a third party supplier and building an automated warehouse in Czechia. Other companies are beginning to do the same,” he said.
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