Operational Excellence for Wholesale Distributors by cmlang


									by: Howard W. Coleman

Executive Summary

Formula For Success & An Operationally Excellent Profile

 Executive Summary

Do you have a vision and desire to transform your operating environment into that of an
operationally excellent distribution organization? Do you clearly understand the defining
elements that separate operationally excellent distributors from the rest of the crowd?
Understanding this delineation provides the necessary benchmarks against which you can
compare your organization in order to achieve a higher level of performance.

 Formula For Success & An Operationally Excellent Profile

The increased competition and greater customer demands characteristic of the current
marketplace mandate that distributors must now become low cost, high quality service providers
in their industry or they will not survive. Consistent with the latter, many distributors have tr ied
to maintain strong, long-term relationships with customers by providing them with high quality
products and superior customer service while at the same time aggressively reducing their unit
costs of distribution.

There are several groups of companies that have either made the shift to this new, are making the
shift, or have been buried. The group of operationally excellent distributors, all who have been
transformed, have been re-engineered for efficiency, productivity, quality of services, and

The constant focus of an operationally excellent distributor becomes working smarter, not faster,
and routinely measuring their progress against a series of rigid standards designed to
continuously improve their performance. By definition, an operationally excellent distributor
must perform at a higher level than the competition to truly differentiate itself from the crowd.
This includes:

 The setting of aggressive corporate goals and supporting strategies designed to continuously
improve performance and provide the necessary foundation for the success of the enterprise.

Operationally excellent distributors are known for setting, what may seem like, unrealistic goals.
However, accompanying these goals are detailed action plans and strategies on how to achieve
them. Goals such as cutting turnaround time for processing orders in half or increasing inventory
turns by 100% are commonplace for this group.

 Proactive projections of product demand and business levels are utilized to anticipate trends
and preferences. The operationally excellent distributor uses this information as a guide in the
ultimate achievement and delivery of the plan, from a market and operational perspective.
Operationally excellent distributors seek to anticipate trends and preferences on a proactive basis
by providing those higher margin, value-added products and services that create markets. Market
penetration plans are created annually and are constantly being monitored to measure progress.
The companys functions provide an essential role to allow sales to achieve their goals in their
chosen markets. Consequently, operations must be tied into the planning process so that proper
inventory levels and internal process efficiencies are consistent with anticipated business levels.

 Progressive purchasing, inventory management and control measures exist in operationally
excellent distributors. In this model, proactive purchasing and inventory managers ask
themselves - how many should I have? and I cant have what I dont sell. The ultimate goal
becomes, maximizing inventory turns and Gross Margin Return on Inventory Investment
(GMROI), - key performance metrics.

Operationally excellent distributors have now shifted the inventory business model toward
proactive management of their inventory. The operating philosophy in this model is I cant have
what I dont sell, rather than the traditional method of the paradigm, you cant sell what you dont
have. GMROI and product ranking by comparative contribution are the overall driving force in
making inventory investments.

 The role of the Outside Sale Force organization is optimized to take advantage of a more
consultative selling approach that is consistent among the reps. while benefiting from Sale Force
Automation (SFA) tools. The Inside Sales/Customer Service personnel become a single point of
customer and sales person contact without wasting significant time checking and researching of

 Management roles are optimized to allow management to spend less time micro managing and
more time directing and leading the efforts of a motivated staff.

 Operationally excellent distributors develop strategic relationships with suppliers designed to
reduce overall costs of the supply channel by utilizing EDI capabilities and even Vendor
Managed Inventory (VMI) to their fullest extent.

 Performance metrics are created and promoted to motivate staff toward the effort of reducing
costs and providing superior customer service.

 Streamlined workflow processes are the determining factor in the ultimate success in
exceeding the expectations of customers. All internal disciplines within the operation from order
entry, purchasing, warehouse picking, packing, and delivery, to invoicing and returns, etc., are
re-engineered to reduce the companys unit costs of distribution.

As distributors try to improve their processes with technology, they find themselves working
with a set of policies and procedures that were designed for the old model, not only for inventory
management, but for most of their internal operating work flow processes. In implementing new
technology, distributors seeking to be operationally excellent first seek to take a fresh look at
their processes so as to identify bottlenecks and redundant activities. This enables them to
redesign workflow to enable the new technology to function properly. They re-engineer all key
work flow processes and develop appropriate decision points, internal controls and management
reports relating to the creation of customer orders through shipment of goods. The objective is to
maximize the productivity of all processes, eliminate bottlenecks, improve inventory
management capabilities and improve overall systems utilization. This reengineering effort will
support each application so that the enterprise does not carry forward its old ways.

 In conjunction with the streamlining activities, state-of-the-art technology is incorporated to
take advantage of radio frequency and advanced bar coding systems for automated storage and
distribution capabilities.

Once processes have been re-engineered to support the new technology, the operationally
excellent distributor is able to bring a host of new technologies to bear. Major tools used by
operationally excellent distributors include:

 Automated Picking

Effective utilization of radio frequency (RF) and bar code scanning technology allows for truly
paperless warehousing and distribution capabilities. RF allows the computer system to send
picking instructions directly to designated pickers through their hand-held devices. The system
directs what orders to pick, the sequence in which to pick them, the storage locations to pick the
product from, and ensures correct picking by verifying that the bar code identification specified
matches the actual item picked.

Companies who have successfully integrated this capability have reported dramatic
improvements in overall order accuracy, elimination of shipments not billed, an ability to hire
less skilled and less expensive picking labor, dramatic improvements in the time necessary to
pick orders, and elimination of the order checking functions.

 Packing, Staging, Loading & Logistics Management

The use of computer generated shipping routes, direct staging and loading manifests are critical
to the success of the operation. Loading manifests identify all packages/cartons with their
assigned carrier/delivery vehicle, carrier staging location, and loading sequence. This
dramatically reduces the amount of effort required. Consequently, trucks leave earlier while the
loading staff can be reduced.

Operationally excellent distributors also track and analyze their actual costs per delivery to more
adequately allocate delivery costs to specific customers. (For example, customers that routinely
order small quantities of low- margin products or have inefficient receiving docks causing wait
time, or are in isolated geographic regions are all scrutinized to ensure proper cost allocation in
the distributors overall business mix).

 Customer Invoice Processing

Paperless warehousing and distribution allows for the elimination of office copies of all orders.
Pickers confirm ship quantities as they scan the product. As a result, customers are billed only
for the pickers actual pick quantity. This virtually eliminates billing mistakes, eliminates the
need to archive paper copies of orders, and allows for same day billing of product shipped.

In the paperless environment, there is no need for billing data entry, proofs of deliveries, credit
expediting, and billing error correction. Accordingly, distributors that have implemented
paperless environments are significantly reducing invoicing and filing staff.

 Product Receipt, Storage & Accounts Payable

All products are scanned immediately at point of receipt. The syste m immediately knows whats
in the building. All internal receiving documents can be eliminated. Backorders are reduced,
inventory turns improved, and paying for product that has not been received eliminated.

Arduous tasks performed by the accounts payable staff such as obtaining paperwork from the
receiving department and researching internal support documents is eliminated. Consequently,
operationally excellent distributors have successfully been able to reduce receiving and A/P staff

 Inventory Accuracy & Cycle Counting

Improvements in the recording, tracking, and controlling of workflow processes allow for a
greater level of inventory accuracy. Operationally excellent distributors no longer perform
traditional physical inventory counting. Discrepancies of either count or storage location
uncovered during picking or stock put-away activities automatically generate a cycle count check
in the system. This allows errors to be corrected on a daily basis, substantially improving
inventory accuracy, improving cash flow and inventory turns. When used effectively,
operationally excellent distributors report 98% inventory accuracy levels.

 Supply Chain Management/Purchasing

Operationally excellent distributors are utilizing supply chain management techniques to
improve their strategic relationship with their suppliers. EDI is utilized to increase efficiency and
lower the cost of ordering, price changing, receiving, invoicing, and payment.

 Insides Sales/Customer Service

The role of the Inside Sales person is evolving. Customers increasingly want their customer
service person to provide a single point of contact for all questions that they may have,
including: product use/application, order status, credit, returns, billing, problem solving,
complaint handling, and consultative selling. In order for this to be effective, the operationally
excellent distributor must ensure that the inside sales/customer service staff is plugged in to the
companys strategy and tactics like never before.

In poorly managed environments, up to 50% of their time can be spent correcting mistakes and
pacifying customers. In an operationally excellent environment, 90% of the time Inside
Sales/Customer Service staff can be performing more value-added customer service.
 Optimization of Managements Roles

Historically, management at a distributor was primarily focused on micro- managing line work,
creating customer service exceptions (i.e.; delivery, price, credit, etc.), excusing service blunders,
looking for superstar personnel who had the ability to operate in a hectic environment, and
worrying about meeting the increasing service demands of the customer. In an operationally
excellent distributor, management can now focus on more pro-actively meeting with customers
and vendors, coaching to solve problems, leading, planning, staffing, and developing more
consistent results among staff personnel.

 Utilization of Performance Metrics

Activity based costing and performance metrics is now widely used as part of the continuous
improvement process necessary to reduce costs and improve customer service. In an
operationally excellent distributor, formal measurement systems exist to measure inventory
accuracy, order fill-rates, and order processing costs. This allows management to now
consistently focus on improvement of the operations effectiveness.

MCA Associates Who We Are

Since1986, we have worked with over 125 small entrepreneurial to middle market clients. We
counsel management on issues related to business process re-engineering, purchasing, and
inventory and supply chain management, sales development and revenue generation, and
organizational assessment and development. We provide value-added and continuous
improvement solutions that result in measurable improvements in revenues, cost reduction,
quality, and productivity. Our clients are distributors, manufacturers, and service providers.

Typical indicators that show there might be a need for our services include:

 lagging sales revenues
 cash flow issues
 too much inventory, or too little inventory to support service-to-customers
 high warehouse, distribution, manufacturing labor costs and poor productivity
 poor customer service
 poor/weak organizational infrastructure
 insufficient performance metrics to monitor company and personnel performance
 old or archaic information technology and computer systems.
 insufficient R.O.I. on new technologies and computer systems

This article was posted on December 07, 2005

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