Distribution Leanness Is Good

October 9, 2006
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Gas prices and the economy are not the only factors affecting current business practices. New ideas of technology, efficiency, and productivity have altered distribution formulas as supply and demand evolves into a commanding link in the supply chain.

In order to compete at these higher levels, distributors are finding it necessary to mesh with new trends and mandatory to expand their efficiency practices. Increased productivity and lean thinking are partners in the new distribution model. Together these ideologies help produce greater efficiency and higher profits.

PRODUCTIVITY IS KEY

According to a report put out by Adam Fein, Ph.D., a member of the Distribution Research and Education Foundation, and founder and president of Pembroke Consulting Inc., wholesale distribution contributed more than 25 percent of the U.S. economy's total productivity over the past 15 years.

Productivity measurement and profitability are key factors aiding the rise of distribution influence. Productivity is most commonly measured by output per hour. This measurement reflects the combined effects of changes in technology, capital per worker, level of output, capacity utilization, managerial skills, and more.

Productivity, not more labor, is crucial to profitability. According to Fein, approximately 60

70 percent of total operating expenses are attributed to salaries, commissions, and benefits. The less spent on this large chunk of a distributor's business, the more that is left as profit.

"The U.S. economy has been able to produce more goods and services over time by making production and distribution more efficient, not simply by adding more labor," noted Fein.

"Distributors are at the forefront of using technology to reduce repetitive, low value

added activities such as order processing, billing, inventory control, delivery route scheduling, and warehouse management."

One distributor took the time to identify its unprofitable customers and analyzed why each customer was losing money. The distributor found that one customer placed multiple orders in a day. The sales force began educating this customer on the financial inefficiencies being incurred, and the excess paperwork that was costing both companies time and money. By directing the customer to the Website, time, money, and effort was saved at both ends of the sales relationship.

THINK LEAN

One way to increase productivity is to think lean. Don't worry about rice cakes and vegetarian bacon; however, do worry about the output per hour number the warehouse is producing.

"Distributors must work to develop a tightly coordinated system that is agile, synchronized, and responsive to customers," said Howard Coleman, principal of MCA Associates, a management consulting firm working with wholesale distributors and manufacturers.

"When put into action, ‘lean' allows companies to serve customers faster, with less space and inventory, lower transaction costs, and greater accuracy."

Lean distribution is not just a trendy model that many are currently following; lean is a completely new way of thinking. According to Coleman, the entire focus of the lean process is to eliminate the nonvalue added activities in the distributorship.

The goals of lean thinking include searching out waste, increasing productivity, lowering total cost, and increasing throughput.

While examining the operations and process of the business, it is normal to run into bottlenecks that limit output, create unneeded inventory, create unneeded manpower, and use unnecessary resources that get in the way of smooth, accurate, timely operations. Bottlenecks are often bureaucratic, paperwork, or a procedural issue.

"Lean thinking provides an operational foundation for service excellence and low total costs," said Coleman.

"It presents a path of sustained performance improvement that is lasting, not just another program implemented that eventually fades out with time."

TEAM BUILDING SKILLS WORK

In order to start this process effectively, distributors have to ask themselves some questions:

  • Do you know your underlying cost structures related to order costs, delivery costs, and line-item transaction costs?

  • Are team building skills and the necessary experience to be successful lacking in the daily operation of the distributorship?

    Team building skills are important because it is an effective team that will lead the distributorship to lean thinking. When putting a task force/team together to accomplish identification and elimination of nonvalue added activities and bottlenecks, "Distributors must choose a team that is truly cross functional and made up of personnel willing to challenge existing norms," warned Coleman.

    Once the team is chosen, there are four major steps to lean thinking success.

    1. Take baseline measurements and record the current levels of every process within the company. It is difficult to determine improvement and establish what does and doesn't work if there is nothing to compare future results with.

    2. Identify the barriers to improvement. These barriers can include: lack of personnel training, cross-training, and teamwork; too many storage locations for the same product; poorly sized storage locations; too many picking exceptions; can't find the product; insufficient product; wrong product; lack of product security; fast-moving products not easily accessible and poorly located; work hours inconsistent with daily workload; errors in receiving; too many backorders; and the list goes on.

    "It is not unusual for each team to be able to come up with 30-40 or more barriers," said Coleman. Don't panic.

    3. Develop a corrective action plan. Seek solutions for each barrier or problem that arises, then try out the solutions. If it doesn't work, make adjustments and try again. Continue to adjust and retry until a process that works is found. Better to hesitate before full implementation, than to place a flawed corrective action plan into permanent use.

    4. Take and compare measurements to the baseline every week. This process is long and can be intensive. It is necessary for the team and the entire staff to share in the victories, both great and small. Posting results is helpful in this situation.

    "The quality of company life improves when you share ideas, implement successful change, and then obtain results," noted Coleman. "Have a realistic sense of how long achieving a lean environment is going to take. A true lean thinking organization doesn't happen in a straight line fashion; it's a combination of all the little improvements that will fit together."

    Publication date: 10/09/2006

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