distribution centers – The OM Blog by Heizer, Render, & Munson

OM in the News: Amazon’s (Sort of) Smaller Urban Warehouses

Amazon’s first major NYC distribution center is nearly the size of 15 football fields and can spit out one million items a day. But the 855,000-square-foot facility on Staten Island is a tightly packed site compared with most of the sprawling warehouses the firm has spread around the country, writes The Wall Street Journal (April 2, 2019). It is 20% smaller than Amazon’s usual fulfillment centers, stuffed with twice as many robots as human workers and able to handle 50% more inventory than traditional warehouses.

The space is used as efficiently as a New York studio apartment, and for Amazon and others companies determined push to deliver goods to consumers as fast as possible, that makes the center a likely model for the future of urban e-commerce fulfillment. Smaller sites are the latest example of how online sales are reshaping logistics networks. As retailers move inventory closer to big population centers, they’re squeezing big distribution operations into smaller buildings that use automation and build up rather than out to get more out of every square foot.

The Staten Island facility has four levels where autonomous Kiva robots help human workers assemble online orders. Inventory is stored on shelves that the robots pick up and deliver to people at workstations on the perimeter. That limits the number of steps human workers take, and allows the company to store more goods in the robot-only sections of the warehouse because they don’t have to build out long lines of racking and walkways for humans to fetch the products. Much of the inventory is presorted at other locations, freeing up space that would traditionally be used for inbound docking and receiving to house additional merchandise.

Classroom discussion questions:

What are the advantages and disadvantages of building vertical warehouses?
How does Amazon make the smaller site work?

OM in the News: Walmart Bets on Consolidation Centers to Win at ‘Inventory Flow’

For big retailers with a lot of suppliers, it doesn’t make much sense to ship items directly from vendors to each individual store. It may not even make sense for vendors to ship to each regional distribution center. That’s where consolidation centers come in, writes Supply Chain Dive (Feb. 26, 2019). Walmart just announced it will open its 10th, a 340,000-square-foot high-tech consolidation center in California that will receive, sort and ship freight from suppliers before sending them to a distribution center.

Using consolidation centers, items from vendors whose purchase orders (POs) are smaller than what would fill an entire truck are consolidated with other similar shipments so that half-empty trucks aren’t showing up at stores. “We believe this investment is going to really set Walmart apart by being able to create a national purchase order for 4,600 stores where we can buy and flow inventory more efficiently than anybody else. The center will be the first to leverage best-in-class inventory management and automated inventory receiving and sortation,” said a Walmart exec.

The goal of the consolidation centers is to get items to Walmart store shelves as quickly as possible. Walmart also sees its consolidation centers as a better way to get the right inventory to the right stores. Walmart now has 10 of them, only not like this special one. They receive less-than-truckload freight shipments for all manner of products making their way to the retail stores and essentially collate freight into truckload shipments of products. From there, Walmart shipments go on to 42 regional distribution centers and the U.S. stores. What’s changing is that the new California consolidation center automates sorting, which allows it to process 3 times more freight volume than an equivalent manually-run facility. Further, order inaccuracies won’t be able to get as far downstream.

Classroom discussion centers:

Explain the advantages of consolidation centers.
What are the downsides?

OM in the News: Warehousing Moving to Retail Locations in the New E-Commerce World

Empty stores and shopping centers are increasingly being converted into warehouse and e-commerce distribution centers. One recent study, reported in Material Handling & Logistics (Feb. 4, 2019), found a surprisingly wide variety of retail-to-warehouse conversions. The projects include the total demolition of obsolete malls to be rebuilt as warehouses in Baltimore, Atlanta, Chicago, and Detroit. Other retail structures that were left standing after the retailers closed their doors also have been repurposed for industrial uses, including a former Toys ‘R’ Us in Milwaukee now occupied by a transmission manufacturer, and Sam’s Club’s conversions of 12 of its stores to distribution centers.

Freestanding big-box stores closer to population centers than they are to warehouse districts are the primary candidates for conversion. These retail structures also typically offer dock doors, ample parking and clear heights compatible with industrial usage. Major retailers who are choosing to expand their omni-channel platforms are transforming underperforming retail properties into e-commerce-driven logistics spaces.

Larger-scale vacant retail properties, such as malls and community centers, are more often purchased by industrial developers and then demolished to be replaced by new industrial construction that is designed to meet the physical requirements of prospective space users. Factors favoring the targeting of retail space for conversion include the prime locations of many retail centers, which often sit at busy intersections or highway interchanges. Another advantage is site access. Standalone big-box stores in particular offer backend docks and easy access for trucks. They also have the needed high ceilings.

“These types of conversions were once unthinkable, and now they’re not only happening, they’re gaining traction,” says one industry leader. “That industrial uses can overtake what are usually higher-rent uses illustrates the strength of demand for industrial real estate, especially last-mile distribution centers.”

Classroom discussion questions:

What are the advantages and disadvantages of converting malls to warehouses?
What is happening to other malls as they lose retail tenants?

OM in the News: Is UPS Stuck in the 20th Century?

Hundreds of workers just streamed in for the shift at UPS’s Mesquite, Texas local package-sorting facility, one of dozens nationwide that help it move millions of parcels daily, writes The Wall Street Journal (June 19, 2018). A 30-year-old analog control panel about the size of a chest freezer monitors operations, with rows of green and red lights indicating when something goes awry in the building’s web of conveyor belts. “Thirty years ago, this was top-notch,” UPS plant manager said of the control panel. “Today, the computing capabilities can probably fit on your phone, and not even a good phone.”

Workers sort packages the old way at UPS’s Mesquite facility, left, while machines do the job in at its Fort Worth site (right photo).

The site, and other similar UPS facilities, haven’t automated much over decades—despite a rush of new warehouse technology in many industries. Today, the company is paying a price. As UPS tries to satisfy America’s 21st-century shopping-and-shipping mania, parts of its network are stuck in the 20th century. The company still relies on some outdated equipment and manual processes of the type rival FedEx discarded or that newer entrants, including Amazon, never had. UPS says about half its packages are processed through automated facilities today. At FedEx, 96% of ground packages move through automated sites.

Now, the century-old delivery giant is playing catch-up. As part of that effort it plans capital spending of more than $20 billion over the next 3 years. Much of that will go toward opening new automated facilities and technology upgrades to route packages around bottlenecks.

A medium-size package at Mesquite gets four “touches” (acts of handling.) Each touch adds a chance for a sorting error or damage. With 40,000 pieces processed an hour, even rare human misfires can add up. Mis-sorted packages can add an extra day to a delivery. All FedEx ground hubs are automated. FedEx workers touch most packages twice—for the unload and the load. Amazon’s operations, too, bristle with automation. It has been years ahead of many logistics firms in warehouse automation, from driverless forklifts to robots that bring shelves to workers.

Classroom discussion questions:

Why must UPS automate?
What advantages does Amazon have in this field?

OM in the News: At KFC, a Bucketful of Supply Chain Trouble

Changes in the KFC distribution system left 600 KFCs in England without chicken.

Diners don’t care about supply chains, distribution centers, or logistics. All they want is their meal. But 2/3 of the 900 British KFC restaurants were closed for 4 days a few weeks ago. The reason: There was no chicken.

“Reliable supply chains that can make—or break—a business’s ability to operate smoothly,” writes Businessweek (March 5, 2018). And it’s the case not only for manufacturers, but also for the restaurant chain that serves up a 14-piece “bargain bucket” of chicken for $24 to British patrons.

When the supply chain goes awry, it can wreak havoc on products that are particularly time-sensitive. That’s what happened at KFC, which pared back its logistics network to cut expenses. The epicenter of the so-called #KFCCrisis was in Central England at a KFC distribution center, which suffered a breakdown in its first week as the hub of the chain’s new strategy. Tons of chicken spoiled there or in the backs of trucks as drivers awaited instructions that never came. Lost sales tallied in millions of dollars.

Just prior to the shutdown, KFC dropped its longtime food-delivery partner, Bidvest, and switched to a pair of German outfits, DHL and QSL. KFC promised “a new benchmark” in food supply, consolidating from 5 regional distribution sites to just the one. But changing long-standing supply practices can be risky, especially true with fresh meat, which is prone to contamination and must be shipped in refrigerated trucks.

KFC’s U.K. restaurants get most of their chicken from two huge suppliers. From those suppliers, the meat is sent via truck to the distribution center, and that’s where things went awry. DHL provides trucks and warehousing, while QSL is responsible for stock management. Under the previous deal with Bidvest, chicken was sent from the regional distribution sites to KFC stores. With the new system, all meat is dispatched from the Central England hub to satellite depots, then moved to smaller vehicles for the last leg. That’s a tried-and-true model for auto parts and parcels, but chicken and car parts are not the same.

Classroom discussion questions:

What went wrong at KFC’s supply chain?
Why should KFC be concerned (and a few dozen stores are still closed)?

OM in the News: Using Drones to Take Inventory at Walmart

drone work in classic warehouse 3d image — Drone working in a Walmart warehouse

Soon, the labyrinthine aisles at Walmart’s distribution centers — stocked high with canned beans, toys and many other products — could also have a low humming sound. The country’s largest retailer, reports Supply & Demand Chain Executive (June 6, 2016), is testing the use of flying drones to handle inventory at its large warehouses, which supply the thousands of Walmart stores throughout the nation. In 6-9 months, the machines may be used in its distribution centers.

At a recent demonstration, a drone moved up and down an aisle packed nearly to the ceiling with boxes, taking 30 images per second. Walmart’s VP of Emerging Sciences and Technology explained that the machines could help catalog in as little as a day what now takes employees about a month. Walmart workers now manually scan pallets of goods with hand-held scanning devices. The drone’s methodical, vertical movements would essentially mimic the path of a person in a forklift who might be inspecting labels and inventory. While a Walmart employee may handle the drone, the technology could mean fewer workers would be needed to take stock or replace missing items.

Walmart is under intense pressure to grow amid an onslaught of low-cost competition, particularly from Amazon. It has committed to spending $2.7 billion on labor and technology to improve its on-line business. Walmart operates 190 distribution centers in the U.S., and each one services 100-150 stores. Millions of items can move through the centers each week and onto a fleet that includes 6,500 trucks and 8,000 drivers to move merchandise throughout the U.S.

Classroom discussion questions:

Why are the drones a potentially important OM tool?
What is Amazon doing to automate its warehouses?

OM in the News: Is Fast Shipping Fast Enough?

Everlane, an online clothing and accessories brand, offers one-hour shipping in New York at no extra charge and in San Francisco for $2

“Free shipping isn’t enough any more,” writes The Wall Street Journal (Jan. 28, 2016). Online shoppers want fast shipping, too, and their expectations of an acceptable delivery window are shrinking. The new demands are largely a result of Amazon Prime, rival retailers say. Tens of millions of Amazon Prime members pay $99 a year and get unlimited 2 day shipping on millions of products, from snow boots to dog food. Now, the retailing giant is upping the ante, offering same day shipping in some markets. Other retailers, whose default shipping option is often 5 business days or more, are scrambling to keep up. Customers for the most part are no longer willing to pay extra for expedited delivery.

With shipping an increasingly expensive part of the business equation, operations managers are looking for cost effective ways to ship faster. They are building more distribution centers, fine tuning ship-from-store logistics and devising more creative delivery options. “Amazon kind of set the path for everyone with Prime. People just expect things faster,” says a luxury competitor. Cole Haan offers free 2 day shipping to online shoe shoppers who spend more than $250. Nearly 1/4 of customers either meet the threshold or pay $15 extra for 2 day shipping. Next month, Gap will narrow its free shipping window to 5-7 business days, down from 7-9 days. To shave off those 2 days, the company is relying on new technology to better manage logistics and routing.

Even just a few years ago, online shoppers were content to wait a week or two. Last year, the average delivery time for online orders was 4.1 days, down from 4.6 days in 2013. To speed up their delivery times, retailers are putting product closer to customers. Some of the biggest companies have a distribution center within a 10-hour drive of anyone in the country.

Classroom discussion questions:

What are the advantages and disadvantages of adding distribution centers (see Figure 11.3 in the text)?
Why does a shoe company, like Cole Haan, offer expedited shipping?

OM in the News: Georgia’s Massive Distribution Centers

Hidden behind the green curtain of Georgia pine forests that surround the Port of Savannah (the nation’s 4th largest container port) are 45.3 million square feet of logistics, storage and distribution centers. Run by some of the most recognizable brands in the country — Walmart, Ikea, Home Depot, Target and Pier 1 Imports — the immense buildings are essential links in the flow of farm, construction and manufactured products streaming out of or into the country through the port, one of the country’s most modern maritime transport installations.

“Traffic, which includes everything from containers of frozen Georgia chicken parts heading to Asia and stuffed dog beds coming in from China, is about evenly divided between exports and imports,” writes The New York Times (March 25, 2015). (Incidentally, companies in the region are leery about opening the interior of their buildings to public view, partly because of the proprietary nature of some of the newer equipment used to move and ship products. Even the systems for storing freight and organizational warehousing techniques are tightly held, a reflection of steep competition).

The largest distribution center is the 2.5-million-square-foot facility owned by Schneider Logistics. Walmart operates a 2-million-square-foot center. Both are expansive enough to completely enclose two typical suburban shopping malls, or all the businesses in Savannah’s historic downtown. Demand for new warehouse and distribution space is intensifying with the economic recovery.

Another significant factor behind the flurry of activity is the expansion of the Panama Canal, a $6 billion project to add a third set of much larger locks to enable bigger container ships to navigate the maritime shortcut across the isthmus. The canal expansion, which is scheduled to open for commercial traffic in 2016, is expected to double the volume of goods making the 50-mile crossing each year to 660 million metric tons.

Classroom discussion questions:

1. Why are these firms building massive distribution centers and warehouses near Savannah?

2. What is the impact of the Panama Canal expansion?

OM in the News: The Case for “Just-in-Case” Inventory

An interesting article in The New York Times (Feb. 13, 2013) proposes that major storms, like Hurricane Sandy, and longshoreman strikes are causing companies to rethink the popular JIT business model, in which only small amounts of inventory are kept on hand, to fashion just-in-case inventory management. The shift has led retailers and logistics companies to alter supply chains by adding distribution hubs. Just-in-case inventory helps retailers keep merchandise on store shelves in the event a supply chain disruption affects one of the major distribution markets.

Since the 1990s, JIT has made sense for companies looking to reduce the cost of keeping large inventories on hand. Technology enabled retailers and manufacturers to closely track and ship items to replace merchandise sold or components consumed in production. The model also reduced transportation costs, because goods would be shipped only as necessary. Now, more companies are trying to strike a balance between “carrying the minimum inventory possible, yet never running out of things.”

For example, Houston’s Ranger Steel, a massive steel plate distributor, recently expanded its network of distribution centers. Until the late 1990s, Ranger regularly trucked its products directly from Houston to customers throughout the US. “For a long time that concept worked like a charm,” said the company’s VP. “Then you started to see the spike in fuel pricing, and new governmental rules that made truck transportation very expensive.” So like many retailers and wholesale suppliers, Ranger has added 7 distribution centers to its network, cutting delivery times to 24 hours by moving its inventory closer to customers. Multiple, well-placed distribution centers minimize the time and distance spent on the final leg of delivery, when trucks are often nearly empty while transporting individual items. “The final mile is the most expensive cost per pound or cost per piece,” writes The Times.

Discussion questions:

1. Why is “just-in-case” being proposed as a JIT alternative at this time?

2. Is the concept of JIT fading?