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The old order-fulfillment model of pick, pack and ship - even when done flawlessly and at top speed - is no longer sufficient for most companies. Holding the necessary amounts of finished-goods inventory to maintain superior customer service levels with this model is simply too costly. And it's too clunky. Today's dynamic supply chains, with their complex mix of global sourcing, multiple channels, customized orders and rapid delivery, require more adaptive solutions.
AMR Research, Boston, calls the new model Advanced Order Fulfillment. "Much as warehouses in the 1980s and 1990s evolved from traditional stocking warehouses into distribution centers that supported cross-docking, drop-shipping and more complex packaging and labeling, customer-facing warehouses are increasingly used to support more complex fulfillment activities, including postponement activities," says Larry Lapide, vice president of research at AMR.
Another take on this trend comes from Forte Industries, Cleveland, which provides consulting and technology solutions for warehouse management. Forte recently launched a web-based initiative called Distribution on Demand (www.distributionondemand.com), which it defines as "the order fulfillment state an organization achieves when it can respond close to real time to changes in demand, while shipping 100 percent customer-compliant orders at the least cost."
"There is no question that distribution has entered an on-demand environment," says Louie Hollmeyer, director of marketing improvement at Forte. At the same time, he says, manufacturing is moving offshore, which puts even more pressure on the distribution and fulfillment side. "Basically, the distribution-on-demand initiative is a call to arms for the distribution segment to seize this opportunity and promote distribution as a frontline business strategy," he says. "Companies can make a great product, manufacture it at the least cost and sell it extremely well, but if they can't deliver it to the right place, at the right time for the right price, then that effort is all for naught."
By whatever name, this more demanding fulfillment model is enabled by robust and well integrated order management, warehouse management and transportation management systems, as well as by inventory optimization technology. And since the goal is to keep the customer happy, Advanced Order Fulfillment also includes metrics designed to look beyond silo performance to overall customer satisfaction.
Moving to this model involves many parts of an organization and requires considerable systems integration, says Lapide. "Ultimately, the warehouse management system will be the key component in a larger, make-to-order fulfillment application ecosystem."
Leading WMS vendors that will help companies make this transition recognize that it is about more than new functionality. "Applications have to move from being data-centric to being process-centric and from being based on rigid business rules to being highly flexible," says Rob Sweeney, vice president of product management at Yantra, an order management and supply-chain execution software provider based in Tewksbury, Mass. "The idea is to define what business process is required to satisfy a customer's demand and then adapt the software or technology component to that business process, rather than trying to mold the business process to how the technology works." Typically, he says, this is where companies hit a brick wall because "infrastructure tends to harden in place over time."
Yantra meets this challenge by building its applications on a component-based architecture. "Each little piece of business logic in the software is like a service," says Sweeney. "You link together different services to complete a process."
|"We have built the same kind of algorithms used in manufacturing into our warehouse management system."|
- Paul Crist of Provia
|How Not to Deceive Yourself About the Perfect Order|
|How to best measure the success of fulfillment efforts is the subject of continuing debate. Kate Vitasek, managing partner at Supply Chain Visions, Bellevue, Wash., does a lot of consulting and training work in this area.|
"It is amazing how many companies will tell you they have a fill rate of 99 percent," she says, "but then when you really start drilling down, you find that the way they got to 99 percent was by expediting a lot of shipments." Another common tactic companies use is to drop an order to the warehouse only when they know the product is in stock. "I go into companies all the time that measure their fill rate based on when an order is dropped in the DC, not when they received the order," she says. "The order could have set around for three days waiting for the inventory to come in or it could have been on credit hold or whatever. The customer wanted it yesterday and it hasn't even shipped yet, but that is being counted as a success in terms or their fulfillment metrics."
To avoid this and other "order fill traps" Vitasek recommends that companies use the Perfect Order Index (POI) to understand how they are performing and where they need to improve. "A perfect order has typically been defined as on time, complete, damage free and having the correct invoice," she says, though there are variations on this theme. Using POI, performance is measured by multiplying the metrics for each of these to each other. "For example," she says, "if a firm is experiencing 95 percent on-time delivery, fill rate, correct invoice and damage-free shipments, the resulting perfect order index would be 81.4 percent. This explains why many companies think they have good performance when they actually are not meeting customer expectations - or are cultivating behaviors that drive costs up."
When Jay Baitler, executive vice president of Staples Contract Division, understood the impact of the multiplier effect, he decided to no longer rate success based on individual components of Staples' version of the perfect order. "We rate ourselves very, very, very hard," he says. For example, if a product is out of stock but can be obtained from a supplier and still delivered on time and to the customer's expectation, "we still ping ourselves for that as a failure because we didn't have it in inventory," says Baitler. "We work very hard to make sure that our recovery in such situations is excellent, but we measure ourselves so as to make sure that those performance numbers get better every single day. The quest for that perfect order is never over."
To effectively implement a perfect order approach, companies need to change their incentives, says Vitasek. "Instead of measuring people just on what is in their control, they need to also be measured on the bigger picture, the overall outcome."
Steve Banker of ARC Advisory Group, Dedham, Mass., agrees. To really address the cross-functional nature of the perfect order, incentives have to be designed so that at least part of the bonus for people in purchasing depends on how well the people do in manufacturing or in the warehouse, and vice versa, he says. Otherwise, "the natural tendency of people is to define metrics from their own internal point of view," he says. "So you end up with a series of departmental metrics that, when you add them up, don't really mean much to the customer."
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