In The Red

With much of a distributor's success dependent on the proper management of inventory, the order process often takes a backseat — that is, until profits start dipping into the red.

The recession has forced many distributors to start looking into their business practices. Distributors were forced to downsize, laying off employees. But others started closely examining the steps they were taking to fill a customer order.

What they found is that their costs incurred throughout the order process has jumped significantly. In fact, since the recession hit, distributors have seen their average cost of filling an order rise anywhere from 7 percent to 12 percent. That equates to the average order for distributors today costing anywhere from $40 to $50 — sometimes more depending on the cost of fuel for delivery trucks, maintenance costs, as well as insurance.

"It's a very surprising number to them. They'll say, 'My God, $50,'" says Howard Coleman, principal of MCA Associates, a distribution consulting firm located in Derby, Conn.

If an order is costing distributors $50, they need to make $50 in gross profit just to break even, says Coleman.

That's not the case, however. As distributors start analyzing the cost to service each customer, they'll notice gross profit numbers don't match up.

"As you start looking at customer ABC and he's done $5,000 a year with you and he's generated a 30 percent gross profit of $1,500, and you find out that over the course of the year he's generated 100 orders, multiplied by $50, that's $5,000," says Coleman. "So the $1,500 in gross profit he generated cost you $5,000."

Most distributors, just by looking at their balance sheets can easily determine what their total cost of doing business is. When it comes to figuring out the average cost of filling each individual customer order, distributors can lean on a simple math equation.

"Basically divide your total overhead costs by the number of orders you receive per year and then break it down by customer," says Coleman. "That can tell you then what your order cost is."

Each process in a distributorship represents some element of cost. Breaking down each step in the order filling process can help distributors better streamline their operations by identifying inefficiencies, which in turn help reduce the costs associated with filling orders.

Order Entry

Most distributors have customers that still prefer the option of phoning in, faxing and mailing orders. Because jan/san distributors still mostly allow these dated methods, they are then forced to deal with the error-prone and labor-intensive task of manually keying in orders into their computer system.

In a typical distributor's operation, when a customer phones in an order, a customer service representative's first step is to access the company's customer database and pull up the specific account to see if any credit or other holds are listed on the account. Once getting past the initial stage with the customer, the customer service rep can then begin taking the order. The rep then checks the inventory through the company's software platform to see if products that are requested are in stock or need to be backordered. The rep then will key in the order, print the product order and distribute it to the warehouse.

Through this process there are several areas in which errors can occur. The most often are when reps mistype a quantity or add an incorrect item to the order. Or, worse, order tickets never make it to the warehouse. These simple errors lead to inefficiencies throughout the order filling process and make everyone's job twice as difficult.

With savvy customers appreciating the convenience of online ordering nowadays, distributors are finding that electronic order entry is one tactic that can change the cost structure in the order filling process by partially automating the order taking process by shifting the task of order entry to the customer.

"We've invested more money into beefing up our electronic order entry because that can eliminate costs quickly," says Eric Cadell, vice president of operations for Dutch Hollow Janitorial Supplies Inc., Belleville, Ill. "You don't then have to staff as many people in customer care. Your customer care people are primarily now just making sure the orders are going through and answering the random phone questions about when their order is shipping and things like that. Online ordering makes life a lot easier and allows you to keep less overhead."

Not all customers are going to order online, however. So, distributors should still be focusing their efforts on ways to speed up and eliminate bottlenecks in the manual order entry process.

Order entry solutions are available for distributors that help replace manual approaches with advanced order management capabilities that in turn simplify and error-proof the order taking process. These can be found within accounting software programs or even more advanced enterprise resource planning (ERP) software platforms. These systems allow easy access to past purchase orders, delivery schedules, backorders, deposits, payments and proof-of-delivery signatures. The software also eliminates the tedious process of having to manually fill out multiple forms. It also eliminates the cumbersome filing of invoices, as it is all done digitally through the computer software. So when orders are done being taken over the telephone, reps can quickly send the invoice via fax or e-mail. By eliminating errors and inefficiencies from order entry, distributors are able to increase their accuracy throughout the order process.

The Warehouse Floor

For many jan/san distributors, the warehouse floor has become ground zero in the quest to reduce costs. Inefficiencies such as how products are stored, using incorrect equipment and not having accurate inventory practices inflates costs associated in the order filling process. After all, each minute a warehouse worker spends scurrying across the warehouse floor searching for a product that is misplaced or picks an incorrect item, the cost of filling an order rises.

"Every time it takes an hour looking for missing material, you're not only losing money against one sale, you're also in a situation where warehouse workers aren't doing the other work, so you're in a situation where it leads to delays getting other shipments out," says Jon Schreibfeder, president of Effective Inventory Management Inc., Coppell, Texas.

Improving the way distributors control and manage their inventory may have the greatest potential for improving their bottom line. In fact, the total cost a distributor incurs from having inefficient warehouse operations can have a significant effect on overall profitability.

If a distributor's warehouse isn't properly designed and organized to maintain the cost of filling customer orders, excessive labor by warehouse employees will bog down the operations.

Most jan/san distribution warehouses are organized in a traditional layout, where similar items are stored together in a logical sequence where a particular group of products are arranged by manufacturer or similar products.

Similar products and items from the same line, however, are not necessarily sold at the same rate. Often, a small percentage of products account for a majority of product requests. So, if products are stored in a traditional layout, a picker might have to walk the length of the warehouse, passing by many slow-moving items — and even worse, dead stock — in order to reach the storage location of a popular product. And then the actual bin where the fast-moving product is stored might be on a high shelf or rack location accessible only by utilizing a forklift truck.

Warehousing experts suggest that storing inventory is best accomplished by assigning products that are requested most often in locations that are the most easily accessible.

"We prefer to arrange material in warehouses based on how often the material is picked," says Schreibfeder. "The more often the material is picked, the more accessible the location it's going to be. All of our strategy is on minimizing the cost of filling orders, so we want those fast moving items in the most accessible locations. This is saving a lot of time vs. your pickers taking a grand tour of the warehouse every time they need to fill an order."

If fast-moving products are stored in the most accessible warehouse locations, pickers don't have to travel as far or reach as high to fill customer orders. The majority of picking activity can then be confined to a small area of the warehouse. As a result more orders can be picked in the same amount of time and the cost of filling an order becomes lower.

For instance, if a distributor pays a warehouse employee $15 an hour and he can pick and fill an average of 20 ticket line items per hour, it costs $0.75 to pick each line item ($15 per hour divided by 20 line items).

However, if inventory is stored more efficiently to minimize the cost of filling orders, the same employee might be able to pick 10 more line items per hour (80 more line items during an eight hour shift), reducing the cost of filling each line item to $0.50 ($15 per hour divided by 30 line items). So if a warehouse (based on 250 business days per year) fills 300 orders per day with an average of four line items each, actual savings for the distributor would be $300 per day (1,200 lines at $0.25), or $75,000 annually.

Schreibfeder recommends distributors implement slotting software to help arrange products in the most ideal locale in the warehouse. Slotting software helps recommend placement of inventory so that the distance warehouse employees travel to pick orders is as short as possible.

Applicable in most warehouse management systems (WMS) or as a stand-alone application, slotting software looks at a map of the warehouse along with the velocity of orders and order mixes entered into a distributor's system and calculates which items are picked most frequently and slots them in the most advantageous position in the warehouse. If done correctly, distributors will see a marked increase in productivity and a decrease in costs associated to fill an order, says Schreibfeder.

Reducing Picking Errors

The biggest mistake — and most costly in terms of the costs of filling an order — is when incorrect quantities are picked or wrong items are delivered to customers.

Every time that a picking error occurs, it reduces a distributor's net profits. In fact, the cost of filling an order doubles, as distributors have to pick, pack and deliver a replacement order.

It also throws off the inventory as the on-hand quantity of the product picked incorrectly is no longer accurate. This has a ripple effect as the distributor's computer system no longer has accurate inventory information of what is currently available for sale. This may then result in promising material to a customer that is not in the warehouse or believing that a product is out of stock when there is actually product on the shelf. On top of money lost by having to correct the picking error, there's also the possibility that the customer will take future business elsewhere.

Directly tied to the key issues that plague warehouse operations — inaccurate orders, inefficient use of labor and outdated inventory data — are numerous technology solutions designed to address these issues head on. An enterprise-based WMS provides significant time and money savings, improved customer service capabilities and optimized inventory levels.

Distribution consultants suggest distributors utilize barcoding technology and other warehouse management technologies to reduce mistakes and improve profitability.

Barcoding can confirm that the correct product is picked to fill a customer order as well as deliver cost-saving benefits, including automatic updating of on-hand quantities. This saves time and eliminates costly data entry errors. By providing a continuous update of on-hand quantities, barcoding gives distributor salespeople up-to-the-second stock availability information. Thus, customer inquiries can be answered quickly and with little effort.

Another benefit with barcoding is that cycle counting is incorporated into the normal picking process. Distributors are then relieved of the duty and expense associated with conducting physical inventory and after-hours cycle counting sessions.

Some distributors have been able to streamline operations because of their access to accurate, real-time data delivered through advanced technology such as voice-recognition software. By implementing voice-picking solutions, companies can eliminate old paper-based tracking methods, reduce employee errors and streamline employee movements. These benefits save money, improve customer satisfaction and help distributors greatly reduce the costs associated with paper use, which otherwise was used for printing picking tickets.

Voice-picking software, which has started to slowly gain popularity by jan/san distributors, allows warehouse personnel to communicate with the WMS via a wireless radio frequency (RF) headset. In this way, the WMS directs workers' receiving and put-away movements with speech commands. Workers then perform the requested task and verbally verify their actions back to the system, while the WMS quickly records all product and employee movements in real-time. This system virtually eliminates errors, while the hands-free process speeds picking. In fact, voice-picking software boasts a picking accuracy of up to 99 percent, ensuring that the orders received are the orders shipped, says Schreibfeder. Obviously, this impacts customer satisfaction levels, but it also saves money in unnecessary labor and fuel costs that many distributors spend when correcting wrong orders.

Deliveries

The delivery process can get quite expensive for distributors. There's the cost of fleet, the money paid towards drivers, maintenance on the vehicles as well as the most costly expense — fuel.

Determining the cost of deliveries is easy to calculate. Divide the number of orders delivered by the total overhead costs incurred by everything associated with the delivery process and that gives a distributor its average cost for delivery. Every customer is not the same delivery cost; however, it at least gives distributors an average and they can start to look at what their customer base is and what each customer's frequency of order is and how that's impacting the distributor's costs.

"It's a surprise. It's like throwing cold water in their face," says Coleman. "The cost of delivery can be $25 or $30 right there."

Determining which orders to combine in a trip, how to load a truck, which drivers or trucks to use and in what sequence to deliver the orders are just some of the decisions that affect a distributor's transportation cost, its service levels and its bottom line.

Inside most distribution operations, delivery trucks are loaded during the evening or early morning hours. The products for each delivery are assembled and placed at the loading docks in reverse order so that the first delivery's order would be the last loaded into the truck for easy unloading.

Delivery drivers typically start their daily shift by sifting through delivery tickets and map out their delivery routes for the day. This is a time-consuming process that typically takes a half an hour to an hour or longer.

The problem with this method is that most delivery drivers map out their stops according to what best suits themselves and not necessarily their company. While distributors want delivery drivers to be as quick and efficient as possible, some drivers often take their time and schedule routes that aren't as organized, says Heike Milhench, president of Milhench Supply Co., New Bedford, Mass..

With the cost incurred in delivering goods, consultants advice distributors to implement routing software. This software helps streamline the delivery process in that distributors are able to take the manual routing out of the hands of the delivery drivers.

Instead of pouring over maps, drivers are given their routes in a fraction of the time through the software. In fact, after implemented, distributors instantly recognize the cost savings that the software provides by planning shorter and more accurate delivery routes.

Not only is less time spent back at the office planning routes, less time is also spent on the road. Delivery drivers can make all their scheduled stops during normal working hours without having to log costly overtime hours.

Some distributors have noticed a 50 percent reduction in route planning time and a 15 percent reduction in driver overtime. These results are getting more distributors to take a look at how the software can help lower their costs of filling orders.

"One of the reasons we're looking at the software is to help create efficiencies," says Milhench. "The software will make us more efficient because it's taking the human error out of the equation with our truck drivers."

Besides routes being planned more efficiently, the software helps distributors load their delivery trucks in a more economical way. Stops can be planned according to load size, helping to achieve more deliveries in a single truckload without frequent trips back to the warehouse. This also speeds up the actual delivery process while at a customer location.

Routing software also allows distributors to fully maximize their fleet. So instead of sending out all four of their trucks 75 percent full, for example, they can send out three trucks at 100 percent full.

Because gas prices continue to fluctuate, delivery costs have risen considerably during the last couple of years. Some routing software design routes without left turns to eliminate costly idle time. For a distributor that has a large fleet of trucks, small improvements in the efficiency of fuel consumption can translate into huge savings and significantly trim the costs of filling orders.

Besides routing software, distributors have found that by equipping their delivery drivers with electronic signature capture devices, they are able to help cut back on clerical time dedicated to filing proof of delivery slips. The devices are then uploaded into the distributor's computer system where clerical staff now has easy access to them instead of shifting through filing cabinets.

"Switching to the electronic signature capture devices we have for the drivers certainly helped make us more efficient when customers call us and ask for a proof of delivery," says Milhench. "Now it's a simple e-mail out to them. So there's some clerical time and money we're saving. And paperwork for sure."

Just because an order is delivered doesn't mean it's the end of the order filling process. Distributors' accounting departments must stay on top of customers to ensure they are collecting payment in a timely manner. Distributors are best suited by covering their bases by sending invoices immediately as each order is placed as well as monthly or bi-weekly statements.

Staying on top of the costs associated with filling orders is imperative in today's tough economy. Identifying bottlenecks and implementing practices that help shave costs off the process of filling customer orders will put distributors in better shape to stay out of the red.