Basics of Fulfillment

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Introduction: Introduction to Fulfillment

What Is Fulfillment?
You're wandering around the shopping center one day when a display in the window catches
your eye. It's one of those classic retro shirts that are so popular. About a year ago, you saw a
designer-label version, and it was ridiculously priced.
On a whim, you go into the store anyway. It looks just like the real thing: 100 percent silk, nicely
constructed, and great colors. The brand name is new to you, but who really cares? You slowly
reach for the price tag and to your amazement it costs about one-third of the designer version
for basically the same shirt.
The salesperson walks up and asks, "Can I help you?"
"Oh, I was just admiring this shirt," you say. "I can't believe how good the price is."
"I know!" the salesperson says. "I don't know how we sell it at that price. I do know we're selling
out every delivery in less than a week."
"In that case, I'll take two," you reply.
As you drive home, you're pleased but puzzled: Where did this great shirt come from? And how
did it get to my local store at such a good price?
An investigation would reveal that the fulfillment process makes it possible to have the products
you want in stock, at a price you're willing to pay. How does this fulfillment process work? This
course introduces you to the basic definition, processes, and goals of fulfillment.
Now, let's get back to those shirts
To learn more about your new shirts, you start with the obviouslook at the tag. It reads: 100%
Silk. Made in Thailand.
So, your shirt was assembled somewhere in Asia Pacific. But, one single country or facility
didn't make your shirt. Let's take a look at the fulfillment process from start to finish:
The product is natural silk, meaning that your shirt started as the cocoon of a silkworm. More
than likely, the cocoons were raised by farmers. Maybedelivered to a factory somewhere
outside Chaiya Phum Province, in Thailand. There, silk was unwound from the cocoons, the
strands collected into skeins, and the skeins bundled and packed into 60-kilogram bales.
The bales of raw silk are then shipped to a silk mill outside Bangkok, where they are woven into
fabric. The fabric is then finished, dyed, and printed. At a nearby facility, the fabric is cut and
sewn into the shirts you just purchased. Buttons from Viet Nam, labels and thread from Sri
Lankaall come together to make the shirts.
The finished shirts are folded and packed into cartons, then sent to a consolidator who loads
them into an ocean-going container along with other products. The container is sent via truck to
the port, and then sent on a small feeder ship to Singapore for the long, overseas journey to the
Port of Los Angeles via containership.
After the container clears customs in Los Angeles, it is sent to a nearby warehouse. There, the
cases never even make it onto the shelves. In one door, sorted by retailer, and moved out the

other doorshipped to your retailer's distribution center in Reno, Nevada. There, the product is
placed on hangers, price-marked, and sorted by store. It is sent by truck to the Denver store
where you bought it. In fact, where you bought two!
Everything we just discussedfrom the silkworm farm to the store where you bought the retro
bowling shirtare components of the supply chain's fulfillment process. Read on for more about
the process of fulfillment.

The Fulfillment Process

Fulfillment is one of the three main processes in the supply chain, along with procurement and
manufacturing. What is fulfillment?
"A process involving the movement and storage of materials, products, and information
from point of origin to the final customerin a way that satisfies the customer at the
lowest cost, producing the highest value for the customer."
Fulfillment coordinates all these effortsto move, mix, store, consolidate, assemble, label, and
package items. Items arrive at the right place, at the right time, in good shape, and at
reasonable cost. This is as complex as it sounds, as you can see in the figure.

Somehow, we have to get all these partieswith their own goals and profit motivesto
coordinate. The common goal is for product, information, and payments to flow smoothly across
the supply chain, through the fulfillment network. We also have to manage the costs that each
fulfillment activity generates. True collaboration is needed to build smooth flows and costefficient processes. What happens if this isn't done? Unhappy customers, added hassle, and
increased costs.

The Goals of Fulfillment

We seek out effectiveness, efficiency, and productivity in our fulfillment operations. Strategies
and processes must balance these targets if we are to achieve the three goals of fulfillment.
Click the arrow to review these three goals.

Meeting the requirements of the customer for on-time and complete orders The
customer is the focus of any good business and, therefore, is the driving force behind
any fulfillment process. If a company can meet and exceed the customer's goals for
fulfillment, it will often enjoy a strong competitive advantage.

Meeting customer requirements at the lowest possible total fulfillment cost

Fulfillment activities are some of the biggest controllable expenses in a business. How
big? In some cases, 20 percent of sales. That clearly merits close attention. By carefully
managing fulfillment processes, companies can become a low-cost provider to their
customers, which further enhances their competitive standing. The grocery industry is a
good example. A penny saved on the distribution of a box of cereal to the retail grocer,
if passed on to the grocer, could raise the grocer's net profit by as much as 20 percent,
given the fact that grocery margins are only about 1.5 percent of sales.

Achieving customer service and cost goals while earning the highest possible
return on assets invested in fulfillment operations Finally, attention must be paid

to the efficient use of assets used in the fulfillment process. Warehouses, transportation
vehicles, handling equipment, computers, and officesall are major assets employed to
achieve fulfillment goals. While high levels of service and low operating costs can be
achieved by huge investments in fulfillment assets, the overall return on those assets
may not be favorable. The object is to balance investment and return.

Seven Rights Make a Perfect Order

Where does the concept of quality come into play? The idea of good customer service is built
on the expectation that we do everything right in the fulfillment process. And that means doing it
right the first time. In this quest to provide quality service and satisfy customers, we focus on
accomplishing the Seven Rights of Fulfillment.
You could achieve the goals of fulfillment every time if every order were executed according to
these seven rights. Doing it right the first time makes the customer happysaves the cost of
fixing errors (wasteful rework)and doesn't require extra use of assets. Business has a big
stake in pursuing the perfect order. In fact, many use "perfect orders" as a key performance
indicator. (We'll talk more about this metric in the Measurement topic.)
So, what exactly is a perfect order? Click the graphic on the left for an example

Think about the last order that you placed via the Internet or telephone. If all Seven Rights of
Fulfillment were achieved, then you received a perfect order. What did your perfect order
fulfillment entail?

The seller had your preferred product available for order,

processed your order correctly,
shipped the entire order via the means that you requested,
provided you with an advanced shipping notification and tracking number,
delivered the complete order on time and without damage, and
invoiced you correctly.

You're happy, they've done their job right, and you have good reason to come back again in the
future.

Introduction: Course Overview

Course Content
The purpose of the Basics of Fulfillment course is to expose you to concepts and terms used in
the fulfillment process. You will get insights into the strategies, processes, tools, and metrics
used to meet fulfillment goals and aim for perfect order performance.
After this topic, which introduces you to fulfillment and to this course, the course focuses on five
topics. Each topic covers a process or concept that directly relates to meeting demand through
fulfillment. Examples, activities, and brief cases are used to enhance your understanding. Click
on each portion of the graphic for an overview of each topic.

Module Objectives

When you complete the Basics of Fulfillment course, you will have a better understanding of
this critical supply chain process. You will know more about the role fulfillment plays in bringing
value to customersits costsand its effect on return on assets. You will understand how a
well-run fulfillment network can create competitive advantage.
At the end of this course, you will be able to:

Understand the goals of fulfillment: great customer service, low fulfillment costs, and
high return on assets.

Recognize key issues in fulfillment network design, transportation, and warehousing.

Describe how fulfillment strategies (like e-commerce's direct-to-customer delivery) drive

network design.

Discuss the issues and strategies that drive transportation decisions: Which modes to
usewhich carriersand doing deals across borders.

Describe the traditional and value-added roles of warehousing.

Discuss how technology enables fulfillment.

Understand why we measure and what the key metrics are.

Click Main Menu to select another topic.

Networks: Introduction to Design

Overview
Take a simple, commonplace product, such as mints. You can find them nearly everywhere
products are soldin grocery stores, vending machines, fuel stations, and restaurants. But,
how does that candy manufacturer get the product to so many placesfrom large discount
retailers in major cities to the smallest of convenience stores in rural locations?
It takes an entire network of facilities to move the ingredients (sweeteners, packaging materials,
chemicals, and the like) to the factory and the finished product to the marketplace. This complex
web of suppliers, factories, transportation companies, distribution centers, and retail stores is
what makes up a typical company's fulfillment network. (Click here for a general graphic of the
fulfillment network)

This topic is an overview of key issues related to the design of fulfillment networks. We begin
with a discussion of the role of networks and factors that influence network design. From there,
we shift to a discussion of several different types of fulfillment strategies and explain their
relationship to network designs. By the end of this topic, you will understand the logic behind the
development of efficient, effective fulfillment networks. You will also be in a better position to
recognize networks that could use some improvement.
The Fulfillment Network
The fulfillment network is the framework for the fulfillment process. The size, shape, and
arrangement of the parts have a bearing on the success of a company's fulfillment operations.
Through this framework, products and information flow from their source point to demand points
as the organization works to meet the fulfillment requirements of its customers.

The Goals of Network Design

The primary goal of fulfillment network design is to devise a set of linked facilities that support
the three goals of fulfillment: customer service, low cost, and asset management goals. Thus,
we need to meet the following objectives when designing or restructuring a fulfillment network:

The fulfillment network must effectively meet market needs

A network must be designed to meet the demands of customersfor the right product,
at the right place, at the right time. That means the right sourcing plan, the right number
of warehouses in the right locations, and the right modes of transportation.

The fulfillment network must be cost-efficient

The number and location of facilities in a network affect product and fulfillment costs.
You have to design networks that support low-cost fulfillment by balancing the costs for
transportation, warehousing, inventory, and lost sales.

The fulfillment network must be flexible

A flexible network can serve customers with differingeven conflictingrequirements.
A network that delivers only in container loads will lose customers who need just a
pallet. A flexible network design takes advantage of your own assetsplants,
warehousesas well as those of your suppliers to fulfill your customers' needs.

Fulfillment network constraints must be understood and addressed

You must understand constraintson transportation capacity, mode, lead times, and so
onto be able to work with them or around them. For example, if a yogurt manufacturer
does not address transportation mode, lead times, and distances in fulfillment network
design, store shelves will be bare while the yogurt spoils on the containership.

The Process
Fulfillment networks include nodes (facilitiesplants, distribution centers, stores) and links
(transportation between the nodes). Network design is the process of selecting and arranging
nodes and links.
Steps in the Network Design Process

Assess suitability of existing facilities.

This involves an analysis of your current assetsplants, distribution centers, storesto
see if any of them can help you achieve your goals. In this complex analysis, you look
at issues like operating and fixed costs, throughput capabilities, and ability to service
customers.

Determine the total number of nodes.

One? Ten? Thirty? Is it economical to produce in several smaller factories, or can you
get economies of scale with fewer factories? Here, a key question focuses on the
number of nodes needed to help control transportation costs, yet still meet the service
requirements of customers.

Determine the location of each node.

Local? Across country? In another country? Location is important because it determines
the cost of transportation. It also places limits on the ability to deliver what customers
want, when they want it.

Assign products and customers to each node.

What nodes should serve what customers? What if one group is equidistant from two
different facilities? This analysis is complicated because of the number of possible
configurations of the network, in terms of which customers are served from which
locations. Simulations are often used to evaluate different scenarios.

Determine mode of transport between nodes (establish links).

How will it get to the customer? Train? Plane? Truck? Each mode has pros and cons as
to cost and service. Mode should be selected based on a balance: total cost to the
fulfillment network versus the impact on customer service.

Select carriers.
Who should be selected to make the deliveries? Once the mode has been selected,
choose specific providers within that mode based on their ability to meet the
requirements specified for the fulfillment network.

Issues to Consider
In the network design process, complex questions arise. It takes a great deal of information to
properly address and answer them. The graphic highlights the most important issues in network
design. The challenge is finding pertinent information and being able to assemble it in a useful
manner. To learn more about these network design considerations, click on each "Issues" box
in the graphic.
Next, we look at the best ways to analyze all the data from the network design process.

Tools and Techniques

Network design projects vary in complexity. The range of tools you can use varies in complexity,
too. There are high-powered optimization models contained within strategic network design
software for the most complex problems. But, that elaborate approach is not necessary for basic
projects. For more on these tools and techniques, click on the graphic.

Charts, Maps, Paper/Pencil In a world of computers, there is still room for intuitive, manual
analysis for the simpler problemslike a network with just a few nodes and links. Using product
volume data, transportation rates, and current facility locations, this technique produces
effective, inexpensive results. The analysis can be done with a calculator or a spreadsheet you
devise.
Computer Models A spreadsheet model depicts each alternative using an equation. Columns
in the spreadsheet list the key data: demand, transportation rates, distances, inventory, and so
on. The spreadsheet software provides calculations to compare alternatives. The spreadsheet
approach, while not as mathematically sophisticated as other approaches, has the advantage of
allowing quick changes in key variables with equally quick recalculation of the costs and other
outputs.
Network Simulation Models This approach develops a model of the network through
formulas. It simulates different conditions in order to find the most effective and efficient network
solution. Simulations mimic the flow of orders and product through a model network. Orders are
generated in patterns similar to real-life. What-if scenarioswith alternative configurationsare
tested by simulating actual conditions. The alternative network configurations are then
compared under each scenario to evaluate which one results in the best, or most "implement-

able," outcome.
Mathematical Optimization Models These models use a series of mathematical formulas
related to transportation costs, facility operations costs, inventory costs, and stock-out costs to
identify the network alternative with the lowest total cost. Usually these models include
numerous, complex mathematical formulas that require extensive sets of data in order to find
the optimal configuration of the network.

Networks: Design Strategies

Influences on Network Design
By now you realize that fulfillment network design is not a quick and easy process. There is
much to do and take into accountfulfillment goals, design elements and questions, key issues,
and more. How do you fit all that together? Are there common network designs for fulfilling
demand? Or, is each network unique?
The real answer lies somewhere in the middle. You do not want to take a simplistic, one-sizefits-all approach to network design. But, you do not need to innovate every time, either. Instead,
network design can be based on the fulfillment strategy that works best in your situation. Most
companies combine elements of more than one proven strategy to design their own, unique
fulfillment network.
A network design should align with internal and customer requirements. Look at factors such as
how important speed-to-market is for the products in questionthe characteristics of the
productsthe nature and size of the typical orderthe significance of transportation costs to
the products in questionand the costs of carrying inventory.
Let's look at some well-known fulfillment strategies:

Direct store delivery

Distribution center network

Cross-docking

Direct-to-customer

Direct Store Delivery

Behind a grocery or discount store during delivery hours, you can see a traffic jam of trucks.
These trucks, from different vendors, are fulfilling retail demand directly from production
facilitiesalso known as direct store delivery. DSD offers multiple benefits, including:

Less inventory in the fulfillment network (eliminates product sitting in warehouses)

Less product handling (reduces likelihood of loss and damage)

Faster production-to-store-shelf time (improves product freshness)

Reduced investment in long-term assets (fewer distribution facilities needed)

Good Uses of DSD

DSD is typically used when there is high and consistent customer demand. This helps to
provide economies in the fulfillment process which offset the high cost of delivering directly to
every retail grocery store. Stable volume also reduces the concerns related to not having safety
stock at a nearby retail distribution center. Products fitting this profile include baked goods,
snack foods, dairy products, and soft drinks. These manufacturers utilize the DSD network
strategy to help them monitor demand, properly rotate product for maximum freshness, and
reduce out-of-stock situations.
Drawbacks
Of course, DSD is not without challenges. Transportation costs are generally higher since
smaller lot deliveries are made. Also, much of the handling cost and fulfillment effort are shifted
from retail distribution centers to the manufacturers. And, an excessive reliance on DSD can
create confusion and congestion at the store level with more deliveries, paperwork, and related
activity. Finally, the strategy is not well suited to products that are associated with high variation
events like holidays and promotions.

Distribution Center Network

We have just seen that direct store delivery works well for high-volume, perishable items like
bread and milk. What about shelf-stable foods, like canned soup, or hardline goods, like auto
supplies or consumer electronics? Frequent, direct delivery of such products is pointless and
costly. A different network strategy balances service requirements with transportation costs
distribution center networks (DCN).
Good Uses of DCN
Products with a longer shelf life, lower average turnover, and potential for demand surges are
great candidates for DCN. DCN relies on multiple facilities to stage product as it moves from
factory to store shelf. While this traditional strategy is far more asset-intensive than DSD, it
provides notable benefits:

Product is consolidated for combined delivery (lowers transportation costs)

Safety stock inventory is available (protects against demand spikes)

Storage capacity enables purchase economies (reduce cost via bulk quantity discounts)

Multiple suppliers ship to one facility (increases access to product variety)

Drawbacks
A big drawback to DCN is the assets required to build and operate a distribution center. Most
companies would rather build new stores or increase production capacity. Also, adding stocking
locations increases inventory levels, which increases inventory carrying costs. And, moving
product through multiple facilities increases handling costs and the risk of product damage.

Distribution Center Network: Cut Delivery Trips & Costs

Consider a fulfillment network of three suppliers and four retail outlets. With direct store delivery,
12 shipping lanes (one from each of three plants to each of four retail stores) are needed. With
the distribution center network strategy, adding a single DC reduces the number of shipping
lanes to seven. More importantly, orders can be consolidated and fewer, larger deliveries made.
Items are held at various locations in the fulfillment networkmanufacturer warehouses, retailer
distribution centers, or facilities in between them, like wholesalersand moved in combination
with other products to achieve economic truckload deliveries.

Realize that our example is very basic. As the DCN growsas more DCs are addedseveral
things happen:

Service to the retail stores improves since the average distance from DC to store
decreases.

Total outbound (DC to store) transportation costs decrease since the average
distance for DC to store is smaller.

Total inbound transportation costs probably go up since the plants must now ship to
more locations; some probably further away, and some in smaller shipment sizes.

Inventory levels increase since safety stock is held at each DC.

Cross-Docking
Cross-docking is a process that supports demand-driven fulfillment networks. With crossdocking, product can be received at a stocking location in large quantities, quickly mixed into an
assortment, and prepared for delivery with minimal handling and no storage. Cross-docking
streamlines the flow of high-volume items, seasonal items, promotional goods, and storespecific pallets. Key benefits of cross-docking include:

Consolidates product for combined delivery (avoids costly LTL deliveries)

Speeds the flow of products from the supplier to the store (reduces stock-outs)

Cuts labor cost and product damage (no storage or retrieval of items and limited
handling)

Reduces finished goods inventory in network (increases inventory turns)

Reduces the need for more or bigger facilities, so investment costs are lower than DCN
strategy (saves money for other initiatives)

Cross-docking requires strong communication and collaboration capabilities. It relies on

technology for real-time information sharing and for maintaining product visibility as product
moves through the fulfillment network. Since product needs to move into a stocking location and
right back out again, cooperation and timely decision-making are essential. All parties have to
know ahead of time how the product is going to be broken down. And, suppliers must keep their
commitment for product availability, order accuracy, and product quality.
You will see more about cross-docking in the Warehousing topic.

Direct-to-Consumer Network
The advent of e-commerce has brought significant attention to direct-to-consumer fulfillment.
However, this network strategy has been in use by catalog retailers and other direct marketers
for decades. These companies rely upon fulfillment centers that pick, pack, and ship orders that
are delivered directly to the final customer by small package carriers or the postal service.
Direct-to-consumer fulfillment operations differ from other network strategies in the following
ways:

Single items are processed instead of full cases or pallets.

Demand fluctuations tend to be much greater.

The number of delivery points grows exponentially.

Service expectations are higher (more demand for next day and second day delivery).

Fewer fulfillment facilities are required as total product volume is substantially lower and
there are fewer transportation economies to be gained by moving closer to demand
points.

Click here to view direct-to-consumer network design options.

Direct-to-Consumer Options
Direct-to-consumer networks can be configured in a number of ways, as the graphic shows.
Most high-volume catalog and e-commerce retailers rely on options 2 and 3 to balance service
and cost. The other options fit specific situations. For example, Office Depot uses option 6 to fill
office furniture orders: items are moved from the DC to each store with final customer delivery
handled by the store's local delivery service.

More Options
Stop-Off Networks A supplier ships orders directly to retail distribution centers, with many
stops along the way. In stop-off fulfillment (sometimes called the "milk run"), several orders are
combined on one truck that is headed to a particular area of the country. The route is carefully
planned to minimize distances traveled, and orders are sequenced on the trucks in the order in
which they are delivered. This option works particularly well if the supplier makes the entire
product line at each facility. There would be no need to develop regional distribution centers to
consolidate and mix products.
Pool Distribution This strategy is similar to a stop-off network, with one primary difference.
Once the truck reaches the central point in the region, the orders are cross-docked onto smaller
vehicles that make local deliveries to customers. This provides for faster transit times to
customers, though delivery costs can be higher.
Virtual Centralization While stores are typically assigned to a primary fulfillment center, this
strategy provides access to inventory in other distribution centers in the network. If the primary
center does not have the requested goods, the goods can be transferred from one of the
alternate locations. This strategy allows the network to reduce the need for safety stock at every
distribution facility.
Transshipment Network flows do not always have to be downstream. It is possible for a retail
fulfillment network to share inventory between facilities at the same level. If a particular store is
out of stock, they can tap into the resources of another store to fulfill customer demand. The key
is to have inventory visibility and the ability to transfer product quickly between facilities.

Networks: Topic Summary

Topic Summary

This topic provided an overview of fulfillment networks. We discussed the main goals of network
design, key issues and considerations when designing a network, and a variety of network
strategy options. The key takeaways from this topic include:

Successful fulfillment networks serve customer requirements while minimizing fulfillment

costs and making cost-effective use of assets. A network design must consider capacity
constraints so as to limit their negative impact.

When designing a network, there is a logical progression of issues that must be

addressed. This process takes you from the number, type, and location of facilities to
the mode and carriers that should be used.

The network design process requires an in-depth analysis of relevant issues. A great
deal of information must be assembled about each entity in the fulfillment network
suppliers, internal facilities, customers, transportation, and products.

Network design should support the company's fulfillment strategy. Common strategies
range from direct delivery to multi-facility distribution systems. (Click for network
strategy highlights.) It is important to understand the pros and cons of each option and
the types of products for which they are best suited before making long-term decisions.

Network design is a complex process. We covered the highlights in this topic, but issues related
to analytical methods, data collection, and software tools are beyond our scope. These issues
must be addressed in any network strategy and design process. One good way to learn more is
to "network" with the people who do thisthe network strategy experts.
Strategy

Primary Role

Direct Store Frequent deliveries from

Delivery
production facilities direct
to retail outlets

Strengths

Distribution Product moved in stages,

Center
through multiple facilities,
Network
to get from factory to store
shelf

CrossDocking

"In one door and out the

other" product prepared
for delivery with minimal
handling and no storage

Shorter time to
shelf
Less inventory
Less product
handling
Reduced
investment in
assets

Lower
transportation
costs
Protection
against demand
spikes
Purchase
economies
Access to more
product variety

Speeds product
to shelves
Fewer LTL
deliveries
Reduced
inventory of
finished goods
Less handling;
no storage or
retrieval
Lower asset
investment

Drawbacks

High cost of
transportation
Some costs shift
from retailer to
manufacturer
No safety stock
nearby
Congestion at
store level

Increased asset
investment
Increased
inventory
levels/carrying
costs
Increased
handling costs
Higher risk of
damage

Requires
processes for
collaboration
among
fulfillment
partners
Requires
technology for
visibility and
real-time
decision-making
Requires
absolute
reliability from

Product Characteristics

High-volume,
perishable
(baked goods,
dairy products)
Customer
demand high,
consistent

Longer shelf life

(canned soup)
Lower average
turnover (auto
supplies)
Potential for
demand surges

High-volume
Seasonal
Promotional
Store-specific
pallets

suppliers
Direct to
Consumer

Pick, pack, and ship small

orders; deliver direct to
consumers

High service
levels
Less total
inventories;
lower carrying
costs
Lower asset
investment

High
transportation
costs
Customers
expect faster
and faster
delivery
Damage rates

Single/Few
items (not cases,
pallets)
Fluctuating
demand

Transportation: Introduction to Transportation

Overview
It's one of those daysyou're a half-hour late leaving for the airport, there's a traffic jam on the
highway, then you get stuck at the railroad crossing. At last you check in and settle in your seat
when the pilot announces, "We will be getting underway in just a few minutes. The ground crew
is loading some last-minute parcels and filling our fuel tanks. The flight attendants will soon be
serving your hot breakfasts that were just delivered to the plane moments ago."
Without a doubt, transportation is a vital activity in the fulfillment process. Effective
transportation is needed for you to get where you are going each and every day, for trucks to
move shipments to and from businesses and customers, for trains to deliver goods between
factories and warehouses, for planes to receive fuel and supplies and take you to your
destination, and for ships to bring goods and people to ports of call.

This topic focuses on decision points about transportationterms of sale, modal and carrier
selection, and negotiating rates and contracts. We look at tradeoffs that affect costs. And, we
look at the global issues that can make international transportation so challenging. You will build
a solid foundation in the key concepts by the time you complete the last activity.

How Does Transportation Fit into Fulfillment?

Remember the definition of fulfillment? The process involvingthe movement and storage of
materials, products, and information from point of origin to the final customerrelies on
transportation. Transportation links physically separated sellers and buyers in the fulfillment
network.
As supply chains become more global, transportation issues become more complex. These
issues hamper the ability to produce goods on schedule, make inventory available, and satisfy
customer demand at a reasonable cost. A breakdown in the transportation networkincomplete
customs documents, a lost containership, an overturned truckcould bring the fulfillment
network to a costly standstill.
Transportation is the key to creating more effective fulfillment networksextending their
capabilities, size, and scope. Transportation helps companies gain access to lower priced
and/or higher-quality material, realize economies of scale in production, and bridge the physical
gaps between producers and buyers. By keeping transportation expenses reasonable, the total
landed cost of a product can be competitive in multiple markets. As a result, companies can
source materials from a global supplier network and sell goods to customers virtually anywhere
in the world.

To get a better sense of what transportation means to business, click to learn more about
transportation spending statistics and the huge number of TEUs (twenty-foot equivalent units)
moved through world ports in 2005.

Transportation Spending Statistics

Here are some interesting spending statistics (from 2005):

Businesses around the globe spent $1.1 trillion to move materials and components to
factories and finished goods to stores.

In the U.S., more than $736 billion was spent on freight transportation, an increase of
$92 billion over the previous year. Over 79 percent of the domestic spending was for
trucking services, including $90 billion for diesel fuel. Spending on rail, air, and water
transportation were closely bunched at $48 billion, $40 billion, and $34 billion,
respectively.

Overall U.S. logistics and fulfillment costs were nearly $1.2 trillion, or 9.5 percent of the
gross domestic product (GDP). This is a huge jump from the 8.8 percent recorded the
previous year.

Vessel Calls at U.S. and World Ports (2005)

http://www.marad.dot.gov/Marad_Statistics/

Transportation: Decision Points

Overview
Transportation involves a number of physical activitiesinspection, loading, documentation
preparation, transfer, and unloading. But a great deal of strategic planning and decision making
must take place before goods are handed to a transportation provider. These decision points
are shown in the flowchart.
In this topic we address, in detail, four of these six decision points:

Terms of the sale (and Incoterms)

Modal selection

Carrier selection

Negotiation Rate and contract

Terms of Sale
When a retail buyer negotiates with a manufacturer, they focus on product price, quality, and
quantity of goods. However, they also need to consider delivery issues. Defining the terms of
sale in the contract is critical because that affects control over mode and carrier selection,
transportation rate negotiation, and related issues. These terms govern the movement of the

product, including when the ownership and title of the goods pass from a seller to a buyer.
Terms of sale are extremely important because they show exactly where the buyers
responsibilities begin and where the sellers responsibilities end, not to mention who incurs the
delivery costs.
Terms of sale options are influenced by the geographic nature of the transaction. Next, let's look
at how trade terms are used in the U.S. and internationally.

Terms of Sale U.S.

Domestic transactions do not involve border crossing, so the terms of sale are not too complex.
In general, there are only two optionsthe buyer takes control of the goods at the sellers
location (FOB Origin) or the buyer takes control when they are delivered (FOB Destination).
Click the arrow for a summary of those options:
Freight Payment Responsibility

Who owns goods

in transit?

Who handles
freight claims?

Who selects and

pays carrier?

Who ultimately
bears freight
costs?

Best used when

who has more
influence with
carrier?

FOB Origin,
Freight Collect

Buyer

Buyer

Buyer

Buyer

Buyer

FOB Origin,
Freight Prepaid

Buyer

Buyer

Seller

Seller

Seller

FOB Terms

Buyer
FOB Origin,
Freight Prepaid
& Charged Back

Buyer

Buyer

Seller

The seller adds

freight costs to
goods invoice

Seller

FOB Destination,
Freight Prepaid

Seller

Seller

Seller

Seller

Seller

FOB Destination,
Freight Collect

Seller

Seller

Buyer

Buyer

Buyer

Seller
FOB Destination,
Freight Collect
& Allowed

Seller

Seller

Buyer

The buyer deducts

freight cost from
goods payment

Buyer

Terms of Sale International

On the other hand, international transactions often present greater challenges. Parties to the
transaction must understand how these terms of sale can affect transportation decision-making.
For example, consider a container of premium vodka moving from Ahus, Sweden, to the United
States. After the product is packed and loaded into the container, the container is moved to the
Port of Gothenburg, Sweden, via intermodal train (or possibly to a different European port via
feeder ship). The container is then loaded onto an ocean carrier and moved to the Port of New
York/New Jersey where it is unloaded, cleared through U.S. Customs, and delivered via truck to
the vodka companys distributors.
Even a relatively straightforward international transaction such as our vodka involves long
distances; multiple modes of transportation; logistics intermediaries; duties and tariffs;
government inspections; and lots of opportunities for damage or delay. So, transportation
managers must be extremely concerned about when and where the title to the goods will

change hands. Why? Click the arrow to review how the terms of sale decisions affect
responsibilities.

Who will be responsible for the control and care of the goodsrisk assessment,
selection of insurance, packing, and other issuesto protect the goods in transit?

Who will be responsible for carrier selection, transfers, and related product flow issues?

Who will bear various costsfreight, insurance, taxes, duties, and forwarding fees?

Who will handle documentation, problem resolution, and other related issues?

Incoterms Rules at the Core of World Trade

On its website, the International Chamber of Commerce defines Incoterms:
the cement that keeps the bricks of world trade contracts together. First devised and
published by ICC in 1936, International Commercial Terms, known as Incoterms, provide clear
definitions that spell out the responsibilities of the buyer and the seller in cross-border sales
contracts. Among the best known Incoterms are: EXW (Ex works), FOB (Free on Board), CIF
(Cost, Insurance and Freight), DDU (Delivered Duty Unpaid), and CPT (Carriage Paid To).
http://www.iccwbo.org/index_Incoterms.asp
Incoterms reduce some of the confusion and complexity involving international shipments. They
make international trade easier and facilitate the flow of goods between different countries.
They define the mutual obligations of seller and buyer arising from the movement of goods
under an international contract from the standpoint of risks, costs, and documents. In practical
terms, you cannot properly develop a contractual price for goods until both parties agree upon
the Incoterms to be used.
Since 1936, Incoterms have been revised and refined six times. The most recent set of trade
rules, known as Incoterms 2000, refined the 1990 rules. The most recent version has additional
information on the use of intermodal transportation and clarifies the loading and unloading
requirements of both buyer and seller.
Click here for a summary of what Incoterms do and do not address (TransportGistics 2006).
Then, we explore some of the terms in more detail.
What Incoterms Do and Do Not Address
Incoterms are used to define the
relationship between Buyer and Seller
regarding:

Mode of delivery
Who has to arrange for customs
clearances and licenses
Passage of title
Transfer of risk and insurance
responsibilities (i.e., who has to obtain
insurance on the merchandise during
transport)
What the delivery terms are
How transport costs will be allocated
between the parties

Incoterms will not:

Define contractual rights

Define liabilities and/or obligations
between the parties
Specify transport details such as
transfer and/or delivery of the
merchandise
Dictate how the title of the merchandise
will pass (even though Incoterms can
dictate when they transfer)
Dictate obligations with regards to the
merchandise prior to and after delivery,
Protect a party from his/her own risk of

When a delivery is completed

loss

Incoterms Options
There are 13 specific three-letter Incoterms that are broken down into four groups. The E term
is used when the buyer takes full responsibility from point of departure. F terms are used when
the main carriage is not paid by the seller. C terms are used when the main carrier is paid by
the seller. And the D term is employed when the seller takes full responsibility to the point of
arrival. (Click here for a more detailed explanation of the groups).
While 13 options may seem daunting, they are neither equally used nor universally applicable to
every transaction. In reality, a great deal of international freight moves under one of four
termsEXW, FOB, CIF, or DDPwhile six of the terms relate to ocean shipping only. A
graphical representation of Incoterm responsibilities and risks is helpful for making sense of the
13 different options (click here for a helpful display).
Understand that each freight movement situation must be properly assessed and the most
advantageous Incoterms selected. It helps to consult with knowledgeable sources (international
freight forwarders, experienced importers and exporters) prior to negotiating international trade
terms. Much can go wrong with global freight moves. You should not assume freight control
unless you have experience, expertise, and resources at your disposal.
Incoterms: A Detailed Breakdown of the Groups
Group

Incoterms

Explanation

EXW Ex Works (named location)

The main characteristic of this group is that the

Seller/Exporter represents to make the goods available at
his/her own premises to the Buyer/Importer. Once the
Buyer/Importer picks up the goods, the Seller/Exporters
duties and obligations are completed and fulfilled. The
Seller/Exporter has very few obligations, has an extremely
low risk of loss, and title is transferred almost immediately in
the supply chain. Almost from the beginning, the
Buyer/Importer bears the risk of loss, title/possession has
been transferred, and he has to insure or bear the risks of
transport.

FAS Free Along Side *

FOB Free on Board *
FCA Free Carrier (named location)

The essential characteristics of this group are that Buyer and

Seller have agreed that the Seller/Exporter is responsible to
deliver the goods to a carrier/location designated by the
Buyer. Again, once Seller/Exporter has made delivery to the
specific carrier/location, then Seller/Exporters obligations
cease and the Buyers/Importers begin.

CIF Cost, Insurance and Freight *

CFR Cost and Freight *
CPT Carriage Paid To (named location)
CIP Carriage and Insurance Paid To (named location)

The essential characteristics of this grouping are that the

Seller/Exporter is obligated for contracting and paying for the
transportation of goods but has no obligation to bear
additional costs nor has to bear any risk of loss once the
goods have been shipped. This grouping proves shipment.

DAF Delivered at Frontier (named location)

DES Delivered Ex Ship *
DEQ Delivered Ex Quay *
DDU Delivered Duty Unpaid
DDP Delivered Duty Paid

This grouping is the exact opposite of the E group. In other

words, the Seller/Exporter has all the obligations of costs,
risks (insurance), and duties, and must make the
merchandise available at the named place of destination
(usually named by the Buyer and will also usually be the
Buyers factory).

* Used only for water transportation.

For an official definition of each Incoterm, go to ICC

Preambles to Incoterms 2000:
http://www.iccwbo.org/Incoterms/preambles.asp

Selecting a Mode of Transportation

The fundamental decision in the transportation process is modal selection: how will we transport
the goods?
There are five traditional modes of transportationtruck, rail, water, air, and pipeline. It could
be argued that there are actually two additional modal options available today: An intermodal
option, which is a combination of two or more modes. And, the Internet, for digital products like
music, movies, and software.
Choosing among the modal options requires a careful analysis of many factors. The
determining factors are capacity, accessibility, transit time, reliability, and product safety. Of
course, cost is also critical in modal selection. We discuss each of these issues, followed by a
brief review of the capabilities and characteristics of the most commonly used modes. (Well
skip pipeline and the Internet since they can only handle very specialized types of products.)
Transportation costs must be kept in balance with service level requirements and overall
fulfillment costs. Understanding these product issues can help.
Product Issues in Modal Selection
Product Issues
Intended use of the
product

The nature and purpose of the goods affects mode selection. Bulk raw materials and component
parts are typically shipped in large quantities to a limited number of facilities via rail, ocean, and
truckload carriers to save money. Why? Transportation costs greatly affect the landed cost of these
goods so the expense must be controlled. Consider for example, kaolin clay, a raw material used to
make car parts, dinnerware, and glossy paper for magazines. Transportation costs account for
almost a third of the product price. So, kaolin is shipped in bulk (in excess of 100,000 lb. shipments)
to production facilities via railroads and ocean carriers.
In contrast, finished goods are normally shipped in small quantities to numerous locations, using fast
methods of transportation. The reason? Transportation costs are a small portion of the product's
costs and product availability is often a more important issue. Magazines printed on kaolin-coated
paper are distributed in small lots (often 50 lbs. or less) to thousands of retail locations via truck or
van.

Importance of the
product

Critical goodsan emergency replenishment order of an advertised product to fill an empty store
shelfaffect transportation decisions. Because these products are needed by a definite deadline,
speed, service quality, and information availability (shipment tracking) take precedence over price.
You'd be willing to pay for same-day or overnight delivery of such goods. Commodity goods, on the
other hand, do not require special attention in terms of transportation. They are not time sensitive,
are stockpiled in bulk, and/or are readily available from multiple sources. Thus, expedited service
and in-transit information are not important. You'd be willing to wait in order to save money. Standard
transportation methods would suffice.

Nature of a product

The nature of a productits physical characteristics, value, weight, packaging, fragility, and risk
characteristicsalso plays a role in transportation decisions. These factors dictate the design and
operation of transportation networks, influence strategic decisions, and impact costs.

Modes Key Capabilities and Considerations

The first step in selecting the most appropriate transportation mode is to match the modal
capabilities to the characteristics of the product (value, durability, and dimensions, shipment
size, origin and destination points, and service level requirements). Key considerations include:

Capacity
The amount of product being moved can render a mode infeasible or impractical. You
have to match the capacity capabilities of a mode to the size and nature of the product
being moved. As you will read, some modes are well-suited to handling a large volume
of goods economically while others are better suited to smaller goods and shipments.

Accessibility
You must determine whether a particular mode can physically perform the transport
service required. Accessibility considers the modes ability to reach origin and
destination facilities and provide service over specified routes. The geographic limits of
a modes infrastructure and the scope of government-approved operating authority also
affect accessibility.

Transit time
The speed with which product is needed affects modal selection as some modes are
obviously faster and more expensive than others. Transit time affects inventory
availability, stock-out costs, and customer satisfaction. Transit time is affected by the
speed of the mode and the ability of the mode to handle pickup and delivery
responsibilities.

Reliability
Dependable service is a hallmark of effective modes and carriers. Reliability refers to
the consistency of the transit time provided by a transportation mode. Because it is
easier to manage fulfillment processes if it is known with some certainty when goods
will arrive, companies place a premium on reliability during mode selection.

Safety
Goods must arrive at the destination in the same condition they were in when tendered
for shipment at the origin. The more fragile and valuable a product, the more critical it is
to work with modes that have a reputation for protecting freight from loss due to external
theft, internal pilferage, and misplacement, as well as damage due to poor freight
handling techniques, poor ride quality, and accidents.

Cost
The cost of transportation is an obvious consideration in mode selection. You must
compare modal service quality to cost, understand rate structures, and seek an
effective balance between transportation costs and other fulfillment costs and
requirements. For example, you should avoid overpaying for a level of service that is
not needed to satisfy customer needs.

Mode:
Truck
Whether you call it a motor carrier, lorry, or truck, it is the most widely used mode of
transportation in domestic fulfillment networks. Good networks of roads permit trucks to reach
virtually all points in a country. So, trucking companies have excellent access to virtually all
freight shipping and receiving locations.
Cost structure: The trucking industry is highly competitive, made up of thousands of private
fleets and for-hire carriers. Key carrier types include truckload carriers, less-than-truckload
carriers, and small package carriers. The economic structure of the motor carrier industrya
high variable cost, low fixed cost businesscontributes to the vast number of carriers in the
industry. They don't pay for the infrastructure, which is government funded and paid via user
fees. Most expenses are incurred as the result of moving freight: wages and benefits, fuel,
maintenance, tires, and fuel prices. These operating costs have a big impact on trucking
industry financial performance.
Serves: Much of the freight moved by the trucking industry is regional in nature, moving within a
500-mile radius of the origin point. Retailers rely heavily on the trucking industry to move
product from manufacturer and distributor facilities to retail DCs and then on to stores. Some of
the primary commodities handled by this mode: consumer packaged goods, electronics,
electrical machinery, furniture, textiles, automotive parts, and other finished and semi-finished

goods.
Pros/Cons: The trucking industry has a stellar service reputation. Motor carriers offer door-todoor accessibility, a high degree of flexibility, in-transit visibility, and excellent freight protection.
These characteristics make trucking the domestic mode of choice for most finished goods. Of
course, there are challenges and limitations. Quality does not come cheap, so customers pay a
premium for trucking services relative to most other modes per kilogram or kilometer. Also,
capacity can be limited due to both equipment size constraints and the availability of drivers.

Air
Historically, air cargo transportation was viewed as an expensive, use only in an emergency
mode. The advent of e-commerce, the growth of global supply chains, and initiatives to reduce
inventory and order cycle time have changed this view. This has contributed to a sustained
increase in demand for air transportation. While air cargo transportation remains a small mode
in terms of tonnage, the value of goods handled continues to rise domestically and
internationally.
Cost structure: Integrated air carriers like FedEx Express and UPS dominate the U.S. air cargo
market. International air freight is moved by a broad range of carriers. The leaders are Korean
Air Lines, Lufthansa, and Singapore Airlines (International Air Transport Association 2006). The
industrys economic structure consists of high variable costs in proportion to fixed costs,
somewhat like the truck cost structure. Air carriers rely on governments to provide terminals and
traffic control of the airways, paying gate leases and landing fees. Equipment costs, though
quite high, are a small part of the total cost.
Serves: Air transportation is used to ship small quantities of high-value, low-weight goods.
Primary commodities handled by this mode: computers, electronics, pharmaceuticals,
perishable foods, periodicals, and apparel. Companies are willing to pay a premium to transport
these goods because they are time sensitive and need superior protection while in transit. For
example, clothing retailers use air freight to move the latest fashion to the marketplace.
Although they may spend 10 times more than they would on water transportation, air
transportation reduces overall fulfillment costs. Fast air service allows these companies to get
key products into stores while they are hot, so they sell at full price. At the same time, they can
send smaller, more frequent shipments based on actual demand. This reduces inventory
carrying cost, as well as risks of obsolescence or lost sales.
Pros/Cons: If extreme speed is needed, air transportation is the way to go. This mode provides
expedited transit times, excellent freight protection, and highly consistent service. The down
side is limited carrying capacity and premium pricing. Given these issues, air service is not a
cost-effective means for transporting low-value or space-consuming, low-density products. Also,
the industry is greatly challenged by numerous obstacles to profitable growth. Ongoing issues
include rising fuel costs, competition from other modes, and costly security mandates.

Water
If domestic freight moves mainly via truck and air is limited in its capacity, then what mode is
moving all the imported goods? Water. Water transport has played a huge role in the
development of many countries; it is a major facilitator of international trade. Of course, barges
and small ships handle some domestic freight, but our interest is in ocean transport and global
trade. On a weight basis, the vast majority of global trade moves via ocean carrier with bulk
materials handled primarily by charter service and containers moved via scheduled liner service.
Cost structure: The economics of ocean transport are similar to those of airlines. To begin
operation, these carriers require no investment for the right-of-way: nature provides the highway
and government entities (known as port authorities) provide unloading and loading services,
storage areas, and freight transfer facilities. The water carriers pay user fees for these port
services only when used. Large ocean-going ships are big capital investments, but the costs are
spread over a large volume of freight transported over the long service life of most ships.

Serves: Ocean carriers dominate international transportation, with about 50 percent of the
revenue and 99 percent of the tonnage. Given the wide variety of equipment types and sizes,
every conceivable type of cargofrom the lowest value commodities to the most expensive
cars and machinerycan be transported via water.
Pros/Cons: Ocean ships have tremendous capacity, which allows carriers to move large
quantities of product over long distances at reasonable costs. (A post-Panamax ship can hold
more than 4,000 40-foot containers.) Customers benefit from a relatively low rate per ton
kilometer. The tradeoffs are slow speed and limited accessibility, which force companies to hold
greater levels of inventory to meet demand during these longer transit times. International
carrier challenges relate to port congestion issues which cause fulfillment disruptions and EastWest trade imbalances that affect the availability of containers and equipment. The industry is
also experiencing double-digit cost increases due to rising fuel costs and security compliance
requirements. These costs must be passed on to customers if ocean carriers are to maintain
their slim profit margins.

Rail
Is rail compatible with todays speed-oriented fulfillment networks? Yes: Railroads transport a
large volume of freight within countries. In the U.S., railroads move more than 1.8 billion tons of
freight annually. The combination of volume and the average shipment length of 975 miles
make rail the highest tonmile mode of transportation. It is primarily used for the long-distance
movement of low-value raw materials and manufactured products, though it can play a role in
the flow of some consumer goods.
Cost structure: The industry is dominated by a small number of large national or private (U.S.)
long haul carriers (for long-distance freight moves across and between regions). Shortline
carriers provide service to smaller markets, handle local delivery service, and facilitate the
interline process. This modes economic structure partly accounts for the limited number of rail
carriers. Railroads require a large investment in terminals, equipment, and trackage to begin
operation; and the accompanying huge capacity allows the railroads to gain economies of scale
as output (tonmiles) increases.
Serves: Primary commodities handled via rail: coal, chemicals, farm products, minerals, food,
and other basic materials. These products tend to be shipped in large quantities and stockpiled
by customers to gain transportation efficiencies. The railroads also handle some high value
goods, primarily automobiles and intermodal containers filled with imported finished goods
traveling inland from coastal ports. In fact, intermodal volume is rising faster on a percentage
basis than traditional rail freight.
Pros/Cons: Rail is a cost-efficient means of moving high-volume freight. It can also help reduce
highway congestion (by substituting for trucks). However, rail suffers from accessibility
problemsmost parties in a fulfillment network are not directly linked to rail service. Also, rail
service can be slow, inconsistent, and inflexible. Notable exceptions are unit trains (a train that
moves only one commodity from origin to destination) and intermodal trains (a unit train of
containers or trailers). They reduce transit times by operating on priority schedules, moving
directly from origin to destination, and avoiding rail yard delays. The challenge for railroads is
maintaining enough capacity and service quality to handle surges in demand. Railroads are
adding new crews and locomotives, but the lack of new infrastructure hampers their ability to
handle more freight.

Intermodal
In many cases, it is impossible or impractical to rely on a single mode of transportation. Instead,
there is intermodal (or multimodal) transportationthe use of two or more modes for the originto-destination movement of freight. Click here for a look at common intermodal options.
Cost Structure: Although no universal statistics are kept on intermodal transportation,
intermodal seems to be growing in importance and volume. The number of containers flowing

through U.S. ports has increased from 10 million twenty foot equivalent units (TEUs) in 1985 to
38.5 million TEUs in 2004. Experts predict this figure will double by 2015. Much of the growth
can be attributed to the development of standardized containers that are compatible with
multiple modes.
Pros and Cons: While moving freight between modes may seem inefficient and time
consuming, intermodal transportation provides a number of benefits.
Offsets accessibility
problems
Utilizes the inherent
strengths of multiple modes
to create efficiencies

Simplifies global trade

Congestion is a drawback

Getting low-sulfur coal from a South African mine to a power station in

Rotterdam would be best accomplished through a combination of rail and
water transportation.
Moving 20 loads of furniture from North Carolina to California via a
combination of motor carrier service for pickup and delivery with rail for the
linehaul portion is far more efficient than an all-truck move. It combines
truck accessibility and speed with rail capacity and low cost.
At a factory in Malaysia, DVD players can be securely loaded into a
container that will be transported via truck to the Port of Kelang where it is
transferred to a containership for delivery to the Port of Vancouver. There,
it is unloaded and delivered via truck to the customers DC. Unlike
transload freight, this containerized freight is well protected and there is
no cost or risk incurred by handling individual units at each transfer point..
The most pressing intermodal issue is congestion. While carriers are adding
capacity to meet the growing demand levels, transfer points (ports and rail
yards) can quickly get clogged with freight. Continued infrastructure
investment, equipment purchases, and operator hiring will be needed to
keep pace with the growth of intermodal transportation

Transportation Cost Drivers

Now that you understand what each mode offers, you should know what drives transportation
costs. This will help you choose the mode or combination of modes that can best handle your
product, fits with the geographic scope of your fulfillment network, and meets customer service
requirements.
Product
Characteristics

Certain characteristics of products affect the cost of moving freight:

Product density factored into pricing because it influences space availability. Because
they use excessive amounts of valuable cargo space on a truck or plane, low-density
products cost more to ship on a per pound basis than high-density products.

Ease of stowing; handling requirements if a product cannot be stowed (stacked,

palletized, or loaded) in a way that effectively uses the cubic capacity of a container or
trailer, it will cost more to ship.

Difficult to handle, extremely bulky, or requires specialized loading equipment

examples include rolls of carpeting and drums of liquid.

Distance

Volume

Risk of product damage or loss potentially fragile products (picture frames, antiques),
dangerous goods (hazardous materials), and high theft goods (cigarettes, prescription
drugs) cost more because extra measures must be taken to protect or insure them.
Origin-to-destination distance is a driver of transportation cost. Most transportation costs (fuel and
labor and equipment wear) rise proportionally with distance. However, there are fixed terminal
handling costs and documentation costs associated with every shipment. Since these fixed costs are
distributed over more miles on a longer shipment, the carrier's costs tend to taper (increase at a
decreasing rate). This tapering effect allows freight to move longer distances without undue cost
burden.
The size of a shipment also affects transportation cost. The heavier the load, the more fuel it takes to
transport the goods. Similarly, the more units in a load, the more handling time it takes to load and
unload the goods. Thus, cost increases with shipment size but at a tapering rate (as with distance
costs).

Services
Required

Some shipments require extra handling, documentation, packing, setup, or other services. Hazardous
chemicals, for example, must be packed in accordance with United Nations standards, special
documentation must be filled out, and placards must be posted on the transportation equipment.
These services cost the carrier a great deal and are typically added onto a freight bill as surcharges
to the transportation rate..

Modal Options Summary of Capabilities

Mode

Strengths

Truck Accessible
Fast & versatile
Customer service
Air

Speed
Freight protection
Flexibility

Water High capacity

Low cost
International
capabilities

Rail High capacity

Low cost

Limitations

Primary Role

Primary Product
Characteristics

Sample Products

Limited capacity
High cost

Move smaller
shipments in local,
regional, and national
markets

High value
Finished goods
Low volume

Food
Clothing
Electronics
Furniture

Accessibility
High cost
Low capacity

Move urgent
shipments of domestic
freight and smaller
shipments of
international freight

High value
Finished goods
Low volume
Time sensitive

Computers
Periodicals
Pharmaceuticals
B2C deliveries

Slow
Accessibility

Move large domestic

shipments via rivers,
canals and large
shipments of
international freight

Low value
Raw materials
Bulk commodities
Containerized
finished goods

Crude oil
Ores / minerals
Farm products
Clothing
Electronics
Toys

Accessibility
Inconsistent service
Damage rates

Move large shipments Low value

of domestic freight
Raw materials
long distances
High volume

Coal/coke
Lumber/paper
Grain
Chemicals

Click to see a comparative ranking of each mode's strengths:

Comparative Ranking of Transportation Modes
Mode of Transportation
Criteria

Truck

Air

Water

Rail

Pipeline

Accessibility *

Transit time *

Reliability *

Security *

Cost **

* 1 = Best to 5 = Worst
** 1 = Lowest Cost to 5 = Highest Cost

Carrier Selection
Now that you know what modes to use, you can select carriers. This is a big decision: carrier
performance can make the difference between a smooth-flowing fulfillment network and one
filled with service disruptions and headaches.
The carrier selection is typically made by someone with expertise in logistics, transportation, or
traffic management who has experience in the purchase of transportation services. These
experts base their selection on a variety of carrier capabilities:

Type of service direct (move unit loads of freight straight to customers) or indirect
(move small shipments to many customers)

Equipment availability and capacity

Transit time (average and reliability)

Product protection capabilities

Geographic service coverage

Freight rates

The experts also keep these issues in mind:

Number of
Options vs.
Mode

Changing
Carriers

Building a
Carrier Base

A major difference between modal and carrier selection is the number of

options. Modal selection involves six primary options, but carrier selection may
involve fewer or far more alternatives. In the case of rail transportation, many
markets are served by a single carrier. Your choice is simple: either use that
railroad or find another mode. At the other extreme are trucks: you could
establish a private fleet or choose from dozens of available carriers.
Another difference is the frequency of the decision. The modal selection is
more long-range, and not likely to change. However, if carrier performance
deteriorates, you should select a new one. While you do not have to choose a
new carrier for each freight move, be vigilant: monitor your carriers service
level and freight rates closely.
A common strategy is to concentrate the transportation buy with a limited
number of carriers. As you shift more volume to your top service providers, a
core group of trusted carriers emerges. This helps leverage the purchasing
budget for lower overall rates and increases efficiencies (carriers learn your
freight flows and requirements; fewer to monitor).

Rate & Contract Negotiation

Rate negotiation with individual carriers can be done on a shipment-by-shipment basis or on a
contractual basis (for a series of shipments or a specified period of time).
Rates for Single Shipments
Single shipment rates are usually negotiated as a discount from some standard published rate.
These one-time rates allow the buyer to maintain maximum purchasing flexibility as there is no
binding agreement involved.
Contract Rates & Benefits
Contracts allow buyers to get a tailored set of transportation services at a specific price. It is
estimated that more than 80 percent of commercial freight moves under contractual rates today.
During negotiations, both the buyer and the transporter focus on issues that affect profitability
and service levels. Click the buttons for details.

Contracts can foster long-term relationships in which the parties collaborate to improve
performance. The strategy of centralized, contract-based rate negotiation aligns well with a
carrier reduction or core carrier strategy. The buyer only contracts and pays for services that are
needed, gains a commitment for scarce capacity, and locks into competitive rates for a specified
period of time. The carrier receives a relatively stable volume of business which allows them to
plan for greater labor and equipment utilization efficiency and reduce the cost of operations.

To refresh your memory, click to review transportation cost drivers.

Buyer Issues

Equipment availability
Delivery speed and consistency
Freight protection and problem resolution
Billing accuracy
Cost of service

Transporter Issues

Volume commitments
Shipment frequencies
OriginDestination combinations
Freight characteristics
Related cost issues that affect ability to serve the buyer profitably

Transportation Cost Drivers

Cost Drivers
Product Characteristics

Certain characteristics of products affect the cost of moving freight:

Product density factored into pricing because it influences space availability.

Because they use excessive amounts of valuable cargo space on a truck or plane,
low-density products cost more to ship on a per pound basis than high-density
products.
Ease of stowing; handling requirements if a product cannot be stowed (stacked,
palletized, or loaded) in a way that effectively uses the cubic capacity of a container
or trailer, it will cost more to ship.
Difficult to handle, extremely bulky, or requires specialized loading equipment
examples include rolls of carpeting and drums of liquid.
Risk of product damage or loss potentially fragile products (picture frames,
antiques), dangerous goods (hazardous materials), and high theft goods (cigarettes,
prescription drugs) cost more because extra measures must be taken to protect or
insure them.

Distance

Origin-to-destination distance is a driver of transportation cost. Most transportation costs (fuel

and labor and equipment wear) rise proportionally with distance. However, there are fixed
terminal handling costs and documentation costs associated with every shipment. Since these
fixed costs are distributed over more miles on a longer shipment, the carrier's costs tend to
taper (increase at a decreasing rate). This tapering effect allows freight to move longer
distances without undue cost burden.

Volume

The size of a shipment also affects transportation cost. The heavier the load, the more fuel it
takes to transport the goods. Similarly, the more units in a load, the more handling time it
takes to load and unload the goods. Thus, cost increases with shipment size but at a tapering
rate (as with distance costs).

Services Required

Some shipments require extra handling, documentation, packing, setup, or other services.
Hazardous chemicals, for example, must be packed in accordance with United Nations
standards, special documentation must be filled out, and placards must be posted on the
transportation equipment. These services cost the carrier a great deal and are typically added
onto a freight bill as surcharges to the transportation rate.

Transportation: Managing Tradeoffs

Overview
Transportation is a "derived demand" function. It only occurs when demand occurs. When
demand occurs, transportation must be synchronized with other fulfillment functions to meet that
demand. Too often, transportation managers are evaluated on their cost per kilometer and
budgetary proficiency, not on their impact on the fulfillment network. So, they gravitate toward
low-cost carriers and discounts for moving large quantities. In some fulfillment networks this is a
solid strategy. In others it is a recipe for disaster. (Refresh your memory about the three goals of
fulfillment.)
Transportation goals must be set, strategies planned, and activities executed with full attention
paid to the potential impact on other fulfillment functions. Faster, slower, bigger, smallerwhich
is best? It depends on the needs of the fulfillment network.
Next, we look at some of the functional tradeoffs between transportation and warehousing,
customer service, and inventory. Keep in mind that you have to consider them in parallelall of
them. And, transportation strategies must support your business goals. That is, you dont want
to be the supply chain manager who suggests that Dell would save money by using truckload
service to deliver assembled computers. It just doesnt fit with their direct-to-customer model.
(And it would likely get you laughed out of the room.)

Tradeoff: Transportation vs. Warehousing

Transportation costs and other supply chain costs tend to move in opposite directions. This
inverse relationship is shown in the graph (Coyle, Bardi and Langley 2003). The fewer the
number of fulfillment centers, the more a company will spend on transportation and the less on
warehousing costs. In this type of centralized network, you have greater distances between the
fulfillment center, its suppliers, and its customers. The greater distances lead to higher inbound
and outbound transportation costs. However, the cost of operating that single facility is lower.
As you move to the opposite extreme with a large number of regional or local fulfillment facilities,
the cost scenario flips. Transportation costs are lower because distances between supply chain
partners are shorter. However, it takes more staff, real estate, and equipment to run the
fulfillment centers properly, which inflates the warehousing costs.
These two costs and their impact on total fulfillment cost must be considered when developing a
fulfillment strategy and network. To focus exclusively on minimizing transportation cost will
prove to be a suboptimal decision, as the graphic depicts. These lower transportation costs are
more than offset by rising costs in other areas, leading to higher total costs.
Determining the right balance between transportation and warehousing costs is a delicate
balancing act. The popular wisdom shifts back and forth based on changes in functional costs
and customer service issues. In the 1990s, many companies focused on centralization and
were willing to take on higher transportation costs to reduce warehousing and inventory costs.
More recently, transportation fuel surcharges, capacity shortages, and increasing rates have
made it more appealing to use multiple facilities as companies struggle with higher
transportation costs.

Tradeoff: Transportation vs. Inventory

You have a similar situation when you compare transportation costs to inventory costs. They too
are inversely related. As transportation costs decrease, inventory costs rise. This is due to the

tapering nature of transportation rates. That is, the cost of moving a 1,000 kg shipment is
cheaper per kilogram shipment than a 100 kg or a 500 kg shipment. Why does this happen?
Carriers give discounts for larger volume shipments. This is partly due to the issue of fixed costs:
some costs are incurred for documentation, pickup stop, delivery stop, and so on, regardless of
the shipment weight. A smaller shipment is more directly affected by fixed costs.
Click the arrow for a discussion of some of the other tradeoffs.
Reduce transportation costs
In an e-commerce purchase: the first item weighing 1.5 kg may cost 7.95 for shipping. Adding a
second item of the same weight does not double the price. In fact, it may only add 2.50 to the
transportation cost. So, we tend to buy that second item. Companies do the same thing. They
tend to place larger-quantity orders to reduce the transportation cost, get a volume discount,
and lower their ordering costs. When you are evaluated on your spend, it is natural to suggest,
Lets order a full truckload instead of a half load this week and another half load in two weeks.
It will save significantly on transportation costs.
Is that the right idea? Not when you measure inventory carrying costs. If it is all bought now, you
end up with higher storage costs, financing costs, opportunity costs, and inventory risks.
or, make a tradeoff
A reasonable evaluation of transportation-inventory tradeoffs will lead those who purchase low
cost, standardized materials toward bulk purchases and deliveries. It will lead those with lean
aspirations toward just-in-time delivery of small quantities. This reduces inventory levels and
requires little or no warehouse space.
Reduce transportation costs
What about transportation speed versus inventory levels? Slower modes are less costly from a
transportation standpoint. But, faster, more costly modes mean less inventory in the network,
faster order cycle times, and more satisfied customers.
or, make a tradeoff
So which is best? It really depends on your product characteristics and value, the difference in
transportation rates for the change in speed, and your service requirements. What works for
one organization may be wrong for another.

Tradeoff: Transportation vs. Customer Service

As you have seen in this topic, transportation has an impact on fulfillment quality and customer
service. If you wanted to, you could spend your way to better service to customers through
better transportation services. Many companies are willing to incur those costs. By shifting from
slower, low-cost modes like water and rail to truck and air, they expect to improve inventory
availability and to reduce lost sales.
The same thing can happen when companies ship to customers more frequently in smaller
quantities. This practice will satisfy the customer and protect sales, but transportation expenses
will rise. Why? Small shipments cost more. A company can go too far with this tradeoff. As the
graph reveals, you can reduce the cost of lost sales to nearly zero, but the transportation costs
quickly become prohibitive.
As with any of these tradeoffs, you have to look at the impact of your decisions on the total
fulfillment cost. It is important to practice restraint, even when doing what the customer wants.
Companies should be willing to take on additional transportation costs, but only to a point (see
the graph where the curves intersect). After that, what you recover cannot offset what you
spend.

Transportation: Managing Global Transport

Overview
Transportation concepts are mostly universal regardless of the region served, distance moved,
or borders crossed. Modal options are the same. Carrier selection issues are similar. Tradeoffs
do not change. However, some factors are specific to a country, and influence the planning and
operation of international transportation networks. These include governmental regulations,
political issues, cultural factors, economic conditions, infrastructure availability, and technology
availability. Get to know the unique characteristics of the countries from which you source
goods and those to which you sell goods.
Issues that are routine in domestic transportation take on added significance in global situations.
Extended distances and increased cycle times are the obvious, but not the only issues. To
protect their financial interests, global transportation managers have to deal with global issues
on every international product move. Next, we look at them in detail:

Transaction Issues

Distribution Issues

Communication Issues

Global Issues Transactions

With every international product move, transfer of ownership, documentation, and foreign
currency present challenges unique to each country. Click to learn more about these global
issues:
Incoterms

A primary transaction issue is the transfer of legal title to the goods from the seller to the
buyer. Attached to this transfer of ownership is the responsibility for the goods in transit. Recall
that Incoterms affect the following activities:

Cost liability determination (transportation, insurance, and tariffs)

Product pricing decisions (based on cost liabilities; to properly price goods)

Documentation preparation responsibilities

Managing goods in transit (identify where responsibilities begin and end)

Figuring out which of the 13 Incoterms should be used for a shipment can appear to be a
tedious, minor issue in international transportation. But your opinion will change should a
problem occur. Because Incoterms provide a clear picture of who is financially and legally
responsible for the goods at any point in the transportation process, they minimize costly
disputes regarding liability for lost, damaged, or delayed goods. For more information about
Incoterms 2000 go the official website: www.iccwbo.org
Payment Terms

Another big issue is payment terms. When developing contracts for purchases from offshore
manufacturers, and/or delivery of the goods with global carriers, you must negotiate the
currency in which payment will be made. Fluctuating exchange rates and inflation issues are
currency risks that you undertake if required to pay for goods or services in a foreign currency.
You might want to conduct transactions in your domestic currency, or you may need to hedge
your exposure.
Also, you must protect your financial interests when dealing with a new supplier or carrier. As
a buyer, you do not want to pay for goods or services until it is clear that they will meet your
expectations. Various strategies such as letters of credit, time drafts, and other instruments
help protect both parties from financial risk.

Global Issues Distribution

The concept of taking production offshore or purchasing from distant suppliers is appealing
lower labor costs reduce product pricesuntil it comes time to move those purchases to your
domestic locations. The transportation of goods from one part of the world to another is filled
with potential challenges.
Potential Challenges

Differences in transportation networks from country to country

You cannot assume that the infrastructure, modal options, regulations, carrier
capabilities, and equipment are the same as in your home country. It is critical to
analyze the situation to avoid little mistakes that cause big fulfillment disruptions.

Distances and complexity of a global transportation network

Think about a typical international move. First, the freight is moved from origin to the
port of export. Then, a long-distance move from port to port occurs. Upon clearing
customs, the freight is delivered to the destination. Your shipment travels through
multiple facilities and countriesis touched by numerous intermediariesand travels
long distances. Compared to domestic transportation, it is easy to see how the global
distribution process can extend transit times, cause delays, and hamper visibility.

Routing issues
Routing can be a bigger issue in global transportation. Unlike domestic moves where
you have one optimal route, many different routes can be used for international moves
(especially long distance moves). For each route, deliberate decisions must be made on
tradeoffs: transit time, cost, freight safety, port capacity and congestion, and carrier
availability.

So what can you do to address these challenges? The simple answer is to remember that even
the most prominent shippers in the world don't try to go it alone. Follow their lead and work with
reputable carriers and third party logistics (3PL) firms. Look for providers with experience in your
key markets and with proven intermodal capabilities. By leveraging the expertise of leading
international freight forwarders, customs house brokers, and global carriers, you will reduce
disruption risks and maintain greater control over in-transit freight.

Global Issues Communication Requirements

Information and documentation facilitate the flow of goods. You must have the paperwork in
order before handing the shipment off to a carrier. They would rather leave it on the pier than
deal with hassles at the other end.
While a domestic shipment can be transported with only one or two key documents (a bill of
lading and a freight bill), an international shipment must be accompanied by a variety of
different documents. These range from the commercial invoice (which is used by customs
agencies to validate, classify, and appraise freight for duties calculation), insurance certificates,
and shipping documents to the critical shipment manifest.
The shipment manifest is central to complying with a recently enacted U.S. security regulation
known as the 24 Hour Rule. This law requires ocean carriers and relevant 3PLs to provide U.S.
Customs and Border Protection with detailed, accurate manifest data on shipments destined for
the U.S. 24 hours prior to loading. Failure to inform Customs results in penalties ranging from
$5,000 for a first violation up to the domestic value of the merchandise.
So what should you do? Its straightforward: take the time to ensure that freight documentation
is accurate and available when needed. This will help avoid missed voyages, duty overcharges,

noncompliance penalties, or having product tied up in Customs due to errors. Once again, 3PL
companies that operate in global venues deal with documentation issues all the time. They have
the knowledge and technology to help keep the product moving.

Transportation: Case Study: A Sound Strategy

Overview
Before you move on to the next topic, take a few minutes to work through this case study. Read
the following story and answer the related questions. It will test your new knowledge and help
reinforce the key learning objectives.
Developing a Sound Transportation Strategy
Sound Explosion (SE) produces those really annoying car speakers that rattle your windows.
The company manufactures their Blasters speaker line in San Diego for U.S. distribution. The
company is growing and is preparing for expansion into the Asia Pacific, starting with Japan,
Taiwan, and Australia. Mick Stewart, company president, has almost completed negotiations to
sell Blasters through automotive after-market retailers. You have been brought onboard to
handle the transportation side of the companys first effort in global fulfillment.
During your first day, Stewart seems to be testing you. Do your best to answer his questions.
Click on each of these issues to get started.
Issue 1 Selecting Trade Terms
Issue 2 Key Responsibilities
Issue 3 Best Modal Option
Issue 4 Managing the Paperwork

Transportation: Topic Summary

Topic Summary
Sellers and buyers in the fulfillment network are connected through transportation. In this topic,
we covered some of the key decision points in transportationterms of sales, modal and carrier
selection, and contract negotiation. We also reviewed the tradeoffs between transportation and
other fulfillment functions, and looked at the challenges of moving goods globally. The key
points to remember from this transportation topic include:

Product factors play a key role in determining how product will be transported. Issues to
consider include the intended use of the goods (inputs to manufacturing or finished
goods), their importance, value (strategic products or commodities), and physical traits.

Mode and carrier selection should be based on the combination of capabilities that best
suit the product being moved. Selection factors include accessibility, transit time,
reliability, safety, security, and cost.

Tradeoffs must occur when making transportation decisions in order to support

fulfillment from a total performance and cost perspective. Looking only at transportation
issues will lead to less than optimal results.

Moving goods globally adds layers of complexity to the fulfillment process. You must
actively manage transaction, distribution, and communication processes to avoid
disruptions and maintain control over flow of goods.

Click Main Menu to select another topic.

Warehousing: Introduction
Overview
What goes on in warehouses? Do they provide value? Warehouses (also known as distribution
centers and fulfillment centers) process customer orders and manage the shipment of products.
That's the traditional role.
Today, warehouses play a role in a lean fulfillment network. Many facilities are highly automated,
moving product quickly and playing a much broader role in fulfillment. Today, warehouses can
be used for the following functions:

Storage

Cross-docking

Breaking bulk, that is, breaking large loads into small loads for delivery

Consolidating (multiple products from one or multiple manufacturers)

Creating full-line assortments

Assembling store-ready display units

Reverse fulfillment

In this topic we present the key activities that occur in a warehouse. We also explore relevant
strategic decision points, like managing tradeoffs and outsourcing. You will see that
warehousing plays a big part in either achieving or failing to achieve the three goals of fulfillment.

Role of Warehousing in Fulfillment Networks

Most companies use some type of warehousing. As a rule, warehouses enhance fulfillment
performance by enabling more efficient processes that, in turn, make the network more
effective.
A warehouse adds to efficiency because it serves as a place to accumulate large quantities of a
wide variety of goods. This makes it possible to ship in bulk into and out of the warehouse.
Without the warehouse, many small shipments might be required from manufacturing sites to
customer locations. This is exactly the situation faced by a large food producer in the U.S. They
make over 6,000 items in plants all over the U.S., yet customers are served from just seven
"mixing center" warehouses. Each one carries a full line of products
Thus, warehouses add efficiency by:

Storing product until it is demandedthis is critical for the buildup of seasonal and
promotional inventories

Consolidating products for shipment to customers, which reduces transportation costs

Performing value-added activities like product customization, labeling, and packaging

Warehouses also make the fulfillment network more effective. Strategic placement of facilities
allows a company to place product close to major markets and customers. That reduces the
time to deliver orders. It also makes it possible for customers to pick up orders in their own
trucks as their trucks return from delivering their finished product.

Are Warehouses Necessary?

Does the efficiency factor suggest that warehouses are necessary parts of a fulfillment network?
No. There are times when it does not make sense to build and fill warehouses. Consider these
situations:

Transportation cost is a small percentage of product's value. These products are

delivered directly to customers because they are insensitive to the delivery cost.
Expensive jewelry is a good example: it would be costly to keep expensive jewelry in
inventory; its high value suggests that direct shipment to customers is the best
approach.

Product is made at a single facility and customers place bulk orders. In this case,
the demand can be fulfilled via direct shipment from the plant in truckload or carload
quantities. For example, a firm selling tons of sugar to one customer every day to be
used in the production of candy would have little need for a warehouse.

Warehousing: Key Activities

Overview
Walk into a distribution center and you will see a flurry of activity. In reality, the entire process is
highly coordinated, and performed under deadline. Orders have to be processed in a timely
fashion to meet customer delivery schedules.
The key tasks undertaken at a warehouse operationreceiving, putaway, order picking, and
shippingare the primary day-to-day functions. They require significant management attention:
they are labor intensive and affect fulfillment performance. Support functionsinventory control,
information systems, security, safety, sanitation, and othersfacilitate the efficient flow of
products.
Next, let's look at the key warehousing activities:

Product handling

Product Storage

Postponement

Product Handling
When product arrives at the warehouse, it must be unloaded and then either placed in storage
or shipped out. When an order is processed, product is moved from its location in storage either
to a staging area [photo], where it awaits loading into a truck, or directly onto a vehicle for
transport.

The goals at a warehouse are to reduce the time to handle product, and to handle the product
as little as possible. How? Products are handled with a variety of techniques: from a person
hand-picking cases onto forklift trucks that carry an entire pallet quantity of product at onceto
highly automated systems, where order selection is directed by computers, inbound product
moves by conveyor from truck to storage area, and outbound product moves from storage area
to truck.
In some fulfillment networks, product can be received in large quantities, quickly mixed into an
assortment, and prepared for delivery with minimal handling and no storage. This process is
known as cross-docking. Retailers use cross-docking operations to support the flow of
seasonal items, promotional goods, store-specific pallets, and high-volume items. For example,
theres no point in holding pallets of holiday candy. You need to quickly move an assortment of
product to each store to maximize selling days. This can be done with a low-tech system
forklift, sorted by hand, and loaded onto trucks. A high-tech system [see the series of photos]
uses conveyors, automatic identification labels, and scanning equipment to automate the crossdocking process.

Product Storage
The second major activity in a warehouse is storing the products. Why do companies bother
with storage if the goal is low inventory? If you were the procurement head of a global
conglomerate, would you accept that your order could not be ready for several weeks? Of
course not. You want it nowminus a few days. So, companies keep some products in stock.
Storage Options
There are a variety of approaches for storing product: stacking items directly on the floor; using
steel racking to hold pallet quantities of product, bins, carousels; and several other specialized
approaches (see figure). The goal in the storage of product is to maximize the use of the
warehouse space, subject to fire safety codes, equipment capabilities, and product safety
requirements.
Storage options can also be driven by fulfillment strategies. For example, catalog and ecommerce merchandisers need different storage options than traditional retailers do. These
direct-to-consumer retailers pick, pack, and ship customer selections of one, two, or a very few
items. This means that there may be two areas in the warehouse. The first area is for
permanent storage. This is where large quantities of product can be stacked efficiently to save
space. The second is a picking area. This is where small quantities of each item are kept in bins
or on pallets that make it easy to reach individual quantities of each item.
Space Utilization
Generally, space is used most efficiently when product is stacked to the ceiling, with fewer,
narrow aisles. Product that is packaged well and moved on pallets can be stacked in high
spaces more effectively.

Postponement A Value-Added Service

Today, value-added services have been pushed from manufacturing facilities out to warehouses
and distribution centers. Warehousing contributes to the creation of lean, demand-driven
fulfillment capabilities through postponement and other value-added strategies.
The object is to postpone the final form of goods until either actual demand occurs or a more
accurate forecast is available. Postponement involves delaying specific operationsassembly,
dyeing, sizing, packaging, and/or labelinguntil just prior to shipping. There are tremendous

benefits to postponement: improved customer servicelower levels of on-hand

inventoryreduced stock-outsreduced risk of product obsolescence.
Postponement services foster fulfillment efficiency, customer satisfaction, and supply chain
innovation. Click for more on these and another value-added service, reverse fulfillment.

improved customer service

Products can be customized at the last minute, so customers get what they want when they
want it.
lower levels of on-hand inventory
Most paint is delivered to stores as white paint. It becomes a custom color when you pick the
exact shade you need. Just think how many cans of paint would have to be stocked at the store
or the warehouse if every shade, texture, and finish combination were created at the factory!
reduced stock-outs
Consider the vegetable processor who fills standardized silver cans and puts them into the
warehouse. When a customer places an order, the cans are run through the labeling machine
with the customers labels. (The processor also benefits from a lower level of on-hand inventory.)
reduced risk of product obsolescence
Some clothing manufacturers wait to dye apparel until close to the season when preferred color
palettes are identified. This can reduce the risk of being stuck with thousands of lime green
sweaters that some fashion buyer incorrectly tagged as the new pink.

Warehousing: Strategic Issues

Managing Tradeoffs in the Fulfillment Network
Warehouse managers need to carefully consider how their decisions affect the rest of the
fulfillment network. Some decisions about warehousing can adversely affect other fulfillment
processes, requiring tradeoffs. Click on the arrow to review the main tradeoffs involving
warehousing.

Outsourcing
Operating a warehouse or multiple warehouses requires a commitment of time and resources.
Rather than perform this function themselves, some companies opt to outsource it to a thirdparty logistics (3PL) provider. Warehousing is one of the most widely outsourced processes for
good reasons.
Benefits of Outsourcing
Click the arrow to review the rationale for outsourcing warehouse operations.

Reduce infrastructure costs.

Reduce direct head count and associated costs.
Third parties have a core competence in warehousing. Often they are able to run the
operation more effectively than the client.
Third parties often serve multiple clients in a single facility. Fixed costs can be spread
across the clients and freight consolidation opportunities can be leveraged.

Third parties frequently have significant technology skills and have invested heavily in
the latest tools to improve warehouse operations, collaboration, and visibility.

Pitfalls of Outsourcing
Sound good? It is, but it's not that simple. You can not hire a 3PL, turn over the keys, and walk
away. Outsourcing requires that your organization maintain oversight of the operations, work
with the 3PL provider to improve warehouse performance, and link these activities to your
fulfillment network. Youve got to build strong relationships with 3PLs and avoid the common
outsourcing pitfalls.
Click the arrow to review the potential roadblocks to successful outsourcing.

Inconsistent (and sometimes incompatible) cultures, objectives, and strategic priorities

Unrealistic expectations of 3PL provider's capabilitiesthey cannot fix broken
warehouse operations without executive level support and authority to change
processes
Excessive performance requirement add-ons (not covered in original agreements)
Over-promising on capacity, technology, and expertise

Case Study: Busy Season Brainstorm

Before you move to the next topic, test your knowledge of warehousing concepts and strategies.
Tasty Grapes, Inc. is an agricultural Billperative owned by more than 750 growers in the U.S.
and Canada. Tasty processes grapes into juice, soft drinks, and food products at three
factory/warehouse locations near San Francisco, Chicago, and Toronto. Tasty runs a traditional,
forecast-based fulfillment network with limited information technoJennifery and little customer
collaboration.
During nine months of the year, this setup works well. However, at harvest timethree months
during the summereveryone goes into panic mode, ignoring standard operating procedures to
cope with all the harvest activities.
After yet another hectic busy season, company officials decided that the three factories should
focus only on the core business of making world class juices, soft drinks, and food products.
Something different would have to be done with the three existing warehouse facilities.
Listen in on a brainstorming session with Bill the Chief Operating Officer, Jennifer the Director of
Logistics, and Mark the Director of Manufacturing. Can you recognize drawbacks to the
proposed solutions? When you hear a drawback, click on the red flag. We'll keep score for you.
Click on the Start button to begin.

Warehousing: Topic Summary

Topic Summary
By now, you realize that warehousing presents many opportunities to make the fulfillment
network work better. Warehouses play key roles in todays fulfillment processes and will
continue to do so in the future. All that is required is a bit of creativity in assigning new roles and
responsibilities to distribution centers, cross-docks, and transfer facilities.
Where will this innovation lead? The result will be a blurring of warehousing, assembly, and
retail operations. The warehouse will increasingly be the place in which final assembly, labeling,

and packaging takes place in support of mass customization and e-commerce fulfillment. The
reasonable labor costs, market proximity, and process capabilities of warehouses are well
suited to these tasks and the changing needs of the organization.
Click Main Menu to select another topic.

Information Technology: Introduction

Introduction
Knowledge is essential to meeting the three goals of fulfillment. Information, along with
materials and money, must readily flow across the network to assure good planning, swift
execution, and alert decision making. Each party in the network needs relevant information to
make forecasts and up-to-the-minute decisions.
The changing nature of fulfillment underscores the need for information and investment in
technology. As fulfillment networks become more global, complex, and demand driven,
information technologies must evolve with them. "Supply chain organizations are under intense
pressure to meet demands for greater customer intimacy, lower cost of goods sold, and
increased global business processes," says a senior executive. "To succeed, these
organizations are identifying that they need to change their supply chain technology footprints."
This topic highlights the important role that supply chain information technology plays in
supporting fulfillment processes. We will introduce you to key information issues that affect
fulfillment. Please consult the additional sources listed at the end of the topic for in-depth
information. These issues include information technology requirements, software solutions, and
emerging tools.

Information Technology: People, Process & Technology

What Makes Technology Work?
The ability to capture and manage supply chain information depends on a strong, wellintegrated network of people, processes, and technology. All three elements must be
considered in the development of information systems or problems will occur.
Today's sheer computing power and information transfer speeds meet the needs of most
fulfillment networks. So, technology itself is not usually the problem when it comes to improving
visibility and achieving synchronization. What is the problem? And how can we solve it?
Click on one of the terms at left for more.
The people buying, installing, and using information systems ultimately determine its success or
failure. Individuals making information technology selection decisions must have reasonable
expectations regarding the technology being considered and consult team members with
operational expertise regarding functionality needs. The people tasked with implementing and
integrating technology need adequate staff and financial resources to complete the work. And,
the day-to-day technology users must be properly trained in the appropriate, accurate use of the
tools.
Process management also plays a role in technologys impact. Organizations must review
existing methods in light of their technology options. The risk of not doing so is that inefficient,
outdated, or unnecessary processes will be automated. Supply chain professionals and their
technology counterparts must also determine how emerging tools can be used to enhance
internal procedures and streamline information flows to fulfillment partners. Standard operating

procedures and goals regarding fulfillment accuracy, productivity, timeliness, and cost also must
be established for technology-enhanced processes. Without them, it would be impossible to
ensure that processes are being performed correctly or generating the desired outcomes.
Technology facilitates effective information sharing when it is based on the open systems
concept to achieve interoperability. Software applications that are based on well-defined, widely
used, nonproprietary open standards require minimal changes to interoperate with other tools.
Data transfer between different applications and systems becomes seamless and there is a
reduced need for data manipulation by each organization.

Supporting Fulfillment Goals

The value and importance of information technology is not lost on fulfillment leaders. Study after
study of supply chain executives reveals that companies are putting more emphasis on
information technology to help them become more competitive, innovative, and adaptive. Their
efforts have had a positive influence on performance. Recent research confirms that supply
chain information technology has a direct and positive impact on organizational performance as
well as internal and external collaboration (Premus and Sanders 2005).
So what exactly should an information technology system support? Youd get some unique
answers depending on a persons fulfillment responsibilities, but universal goals exist. The
following list highlights some of these goals.

Enhance visibility outside the four walls of the organization

Organizations benefit from the ability to monitor what is happening across the fulfillment
network. They need supply chain tools that readily generate information that's useable.
These applications must be able to collect vast amounts of data regarding demand,
inventory flows, and orders; filter the data; and present it in a form that can be readily
used.

Achieve collaboration with fulfillment partners

Technology must facilitate real-time information sharing between fulfillment network
participants. Open access to timely, accurate, complete, and relevant information
supports effective planning and execution of supply chain strategies. Hence, the
concept of interoperability and the use of the Internet as a platform for supply chain
information sharing are critical.

Develop ability to dynamically manage exceptions

Information technology systems must go beyond visibility. To avoid demand fulfillment
disruptions, you must be able to spot exceptions and respond appropriately in a timely
fashion. Heres a quick analogy: Think of a guy walking on a sidewalk where a piano is
about to drop. A visibility solution tells him that the piano is falling. An intelligent
exception management solution tells him to get out of the way. (Trebilcock 2002)

Elevate analytical and decision support capabilities

Whether youre trying to optimize a delivery route, design a fulfillment network, or
forecast demand, its beneficial to have supporting information and tools. Data
warehouses are used to consolidate information from multiple fulfillment functions and
partners. Analytical decision support tools and data mining applications use this data for
identification of possible scenarios and what-if analysis of different options.

Automate repetitive processes, interactions, and information sharing

At the least, systems should handle day-to-day and routine tasks. Technology can
automate process monitoring, data collection, report generation, and other tasks. If it
can then alert us to problems and offer solutions (or better yet, implement them), it
becomes much easier to prevent data overload and suboptimal decision making.

Information Technology: Software Solutions

The Software Marketplace
The supply chain software marketplace includes technologies that address virtually every
function and task that occurs in the fulfillment process. Whether you need to develop a forecast,
optimize the delivery of goods, maintain visibility of inventory, or monitor order fulfillment
performance, there is software available (or under rapid development) to assist your efforts.
These tools attempt to harness the computing power and communication abilities of todays
technology to help organizations plan, execute, and control fulfillment activities in real time.
Organizations recognize the potential value of these tools and are investing vast sums of money
to collect, analyze, and make more effective use of fulfillment information. ARC Advisory Group
(2006) estimates that global spending on supply chain management software applications
exceeded $5.5 billion in 2005 and will grow to $8.3 billion by 2010. Additional investments are
being made in radio frequency identification tools and other hardware.
As you might expect, it takes a wide array of tools to accomplish these goals. In this topic, we
look at the generally recognized categories that supply chain solutions fall into. We use a puzzle
analogy to highlight the critical need for linkages and information sharing between each
software category.

Planning Tools
Supply chain planning applications help organizations evaluate demand for materials, capacity,
and services so that effective fulfillment plans and schedules can be developed. These tools are
employed across supply chain processes, assisting with decisions regarding the number and
location of facilities (network design), where to purchase materials (strategic sourcing), and the
need for goods (demand forecasting), just to name a few tasks. This category encompasses a
comprehensive set of software tools designed to help managers gain more accurate, detailed
insight into issues that affect their development and planning of supply chain activities.
These tools address a wide range of planning horizons and address important issues like
demand forecasting. Moving from manual, independent processes to software that leverages
real-time data and enables collaboration across departments, suppliers, and customers has a
positive effect on forecast speed and accuracy. Shorter-range planning tools that support sales
and operations planning and distribution planning can leverage these forecasts. Fulfillment
managers will ultimately be able to make better operational and tactical decisions, leading to
more efficient process execution, reduced waste and stock-outs, and improved profitability.
Example
Can better planning make that much of a difference? In the case of Welchs, the answer is yes
(Bednarz 2004). The maker of juice products implemented a demand planning system to
coordinate information from marketing, sales, finance, and production to create a single,
accurate companywide forecast of retailer demand. The goal was to better coordinate trade
promotions, production, and fulfillment. Welchs expects the new planning system will help the
organization trim its inventory by 15 percent, cut inbound raw material expediting by 30 percent,
and reduce product obsolescence by 30 percent.

Execution Software

Supply chain execution tools and suites carry out key tasks from the time an order is placed
until it is fulfilled. This order-driven category of software focuses on the day-to-day activities
required to buy, make, and deliver the materials that flow through the supply chain. Traditionally,
execution tools have focused on a companys internal fulfillment activitiesorder management,
warehouse management, inventory management, labor optimization, and transportation
management. As attention shifts to integrated fulfillment capabilities, the category is
encompassing a broader array of functionality including procurement, supplier relationship
management, and customer relationship management.
Supply chain execution doesnt rely upon a single software program. Instead, it requires a group
of tightly integrated tools that link well with supply chain partners systems to share relevant
data and provide visibility. Interest and investment in execution tools is growing because of the
strong capabilities being developed, cost savings, and return on investment being achieved.
Successful implementation can provide users with improved inventory visibility, improved data
accuracy, faster throughput, higher inventory turns, better control of transportation costs, and
improved customer service (Maloney 2006).The tools also support supply chain planning, event
management, and performance metrics. "The secret of execution, the reason it's so important,
notes a software executive, is that the data generated is what drives the rest of the business.
(Tirschwell 2004)
Individually, we also rely upon these supply chain execution tools to carry out order fulfillment.
When you want to purchase a digital camera, you interact with an order management system
(OMS) via the Internet to prepare and transmit your request. The OMS checks the availability of
inventory through its link to the warehouse management system (WMS). If the inventory is
available, your order is processed and transmitted to the WMS, which schedules the picking
and packing of your camera. When it is ready to be shipped, the transportation management
system (TMS) selects a carrier, optimizing delivery cost within your transit time requirement.
You can also use the carriers system to monitor the delivery status of your order until it arrives
at your front door. Without these execution capabilities, the order-to-delivery process could take
weeks instead of days and you would have little visibility into the process.
Because they are so widely used and play such an integral role in fulfillment, Warehouse
Management Systems and Transportation Management Systems are worth a closer look.

Execution Software: Warehouse Management Systems

Warehouse Management Systems (WMS) are widely used to support fulfillment operations.
WMS is a software control system that improves warehouse operations through efficient
management of information and completion of warehouse tasks, with a high level of control and
inventory accuracy. These tasks include receiving, putaway, picking, packing, shipping, storage
location, work planning, warehouse layout, and analysis activities.
What Is WMS?
As you can see, a WMS is more than a simple database that provides stock location information.
Instead, it is an integrated package whose components consist of dedicated localized computer
hardware and the necessary applications software. Advanced systems support paperless
processes; enable integration of materials-handling equipment, picking systems, and sorting
systems via wireless communication tools; and support automatic collection of product data.
The Benefits
The benefits of WMS are significant. Improved warehouse productivity, efficiency, and accuracy
are the obvious benefits. By keeping track of item locations in the warehouse, the WMS reduces
wasted efforts associated with warehouse personnel hunting for an item. This improves labor
productivity and improves the order-picking accuracy. The WMS also improves space utilization
by determining the optimal storage patterns to maximize space utilization. In addition, WMS

technology provides improved managerial control and effectiveness through point-of-work

confirmation, accountability, performance measurement, and what-if scenario planning.
Custom or Off-the-Shelf?
Today there are literally hundreds of companies supplying WMS systems, and a key issue is
whether the warehouse should use one of these off-the-shelf systems or develop a custom
system in-house. The choice is difficult because of the fast pace of change in the industrya
custom system designed today may be out of date by next year, and the extra cost of the
customization may not be warranted. However, off-the-shelf versions tend to drive the
processes in the warehouse rather than being tailored to the warehouse's existing processes.
Thus, flexibility can be lost with these systems. The challenge is to decide which option best
integrates your organizations existing supply chain technology and supports your information
requirements.

Execution Software: Transportation Management Systems

Software tools related to the movement of goods across the supply chain are lumped together
in a general category called Transportation Management Systems (TMS). TMS is defined as
information technologies used to plan, optimize, and execute transportation operations (Autrey,
et al. 2005).This simple definition captures the essence of TMS, presenting it as a melting pot of
applications used to assist managers in nearly every aspect of transportation, from basic load
configuration to complex transportation network optimization.
Planning
The planning capabilities of TMS assist transportation managers with pre-shipment decisions.
TMS tools allow organizations to consider a vast array of transportation options in a matter of
minutes versus hours or days of manual design activity. In addition, freight planning tools can
be linked to order management systems, warehouse management systems, and supply chain
planning tools to gain timelier, comprehensive information. With this knowledge, better supply
chain decisions and tradeoffs can be made. Critical TMS planning applications include load
planning, routing, and scheduling.
Execution
TMS execution tools help transportation managers streamline some of their shipment activities.
With multiple shipments needing delivery each day, manual processes are susceptible to errors,
missed deadlines, and customer service failures. Various TMS capabilities automate repetitive
activities to reduce labor costs and accuracy problems. Other tools post detailed shipment
information to a shared network or a website to promote shipment visibility and provide greater
freight control. Three of the key execution tools include load tendering, status tracking, and
appointment scheduling.
Analysis
TMS analytical tools provide organizations with the ability to make post-shipment evaluations of
carrier performance, customer service, and fulfillment cost. The data required for analysis can
be spread across the entire fulfillment network in a variety of documents and information
systems. It is critical to collect this data in a timely fashion so that the KPIs can be measured,
performance benchmarked, and corrective action taken. TMS help organizations assemble and
make sense of the vast array of transportation data that is generated by freight movement.
Useful analytical applications include performance reporting, scorecarding, and freight bill
auditing.

This range of capabilities has led to widespread interest in TMS. It is viewed as a critical tool for
managing transportation cost and service across the supply chain. The worldwide estimated
market for TMS was $893.3 million in 2004, up $20 million from the previous year according to
ARC Advisory Group (Cooke 2005). Continued growth of TMS implementation is expected.

Event Management Tools

Supply chain event management tools collect data in real time from multiple sources and
convert it into information that gives managers a clear picture of how the fulfillment network is
performing. These systems track inventory as it flows through the system, providing graphical
displays of expected and actual inventory levels and other key data at each location. An
important feature is their ability to define business rules that trigger alerts when specified events
occur, or when they fail to occur. This capability allows managers to focus their attention on
managing exceptions rather than having to monitor every movement and compare it against
plan (Taylor 2004).
For most companies, it's just not possible to monitor activities manually. That is why supply
chain event management tools are becoming more important. More organizations are turning
toward these solutions to help them detect and resolve issues before they snowball into major
problems. The newest tools use optimization routines to evaluate the severity of a situation, and
either to propose alternative solutions to decision makers or initiate action based on established
guidelines.
Example
A U.S.based retailer uses an event management system to monitor on-time supply delivery
status. They receive an alert when a late delivery occurs or is likely to occur. By having early
visibility into delayed shipments, the company can automatically identify an alternative source of
supply to avoid stock-outs. They also have taken steps to reduce safety stock levels. With the
new system, the company has increased product availability, visibility, and control over its
inbound supply chain. In the first year, they reduced in-transit inventory by 50 percent (valued at
over $20 million). (Sapient Corp. 2002)

Business Intelligence Tools

Business intelligence tools build on the traditional kind of reportinghistorical accounts of
functional performance for internal planning, operations, and control. The newer capabilities are
more dynamic, delivering data from transactional systems across the fulfillment network to a
data warehouse. The data can be analyzed and fresh information sent to front-line employees
and executives for more effective planning and decision making.
In addition to the data collection and analysis capabilities, business intelligence software
supports self-service reporting, performance scorecarding versus goals, development of
graphical report displays like dashboards, and other activity monitoring in support of event
management. These tools can provide better access to data residing on multiple systems,
improve knowledge of decision makers, and support collaboration.
Interest in business intelligence applications is rising, mainly because software vendors have
increased the user-friendliness of the tools. Previous generations of business intelligence
software were geared toward trained analysts. The new tools make it easier to interpret data via
simple dashboard items, such as charts, graphs, and maps. Because these graphics are linked
to the data warehouse, it is possible for non-techies to manipulate them, review the effect of
different variables on results, and test alternative scenarios, in addition to monitoring
performance (Totty 2006).
Example
American Eagle Outfitters (AEO) uses business intelligence software to monitor its supply chain
security and social compliance initiatives. The retailer is also rolling out a web-based vendor
scorecard program to measure the performance of its vendors, from concept to delivery.
Eventually, the scorecard data will be integrated into AEOs operational processes. Order

placement and service provider decisions will be made with knowledge of each vendor's
performance relative to social and customs compliance, among many other measurements,
such as quality, cost, and delivery time. (DesMarteau 2006)

Related Tools
While the four categories of supply chain software cover much of the solutions spectrum, other
valuable tools exist. Some fall in between the categories, while other software applications are
not specific to the supply chain. Although difficult to categorize, they improve the flow and
usefulness of fulfillment information, support the development and implementation of key
strategies, and enhance analysis.
Category

Description

Enterprise
Resource
Planning
systems

ERP systems are multi-module applications that help organizations integrate information
and activities across the organization (the "enterprise") via a common software platform
and centralized database system. Many of the supply chain software applications we
have discussed rely increasingly on the type of information that is stored inside ERP
systems. It is also possible to purchase integrated supply chain applications directly
from ERP vendors or from vendors whose products readily bolt on to the ERP system.

Data
synchronization
applications

These tools provide a platform for manufacturers, distributors, and retailers, to

aggregate and organize item-related data (like item number, price, description, and
weight). Cleaning up the data so that it is consistent across multiple organizations is
required for using automatic data collection technology; streamlining and automating
processes; and improving supply chain visibility.

Spreadsheet
and database
software

You may be surprised to think of these commonly used applications as relevant to this
discussion, but spreadsheet software is a handy, portable tool for gathering,
consolidating, and analyzing fulfillment. However, it is critical that the planning and
analytical work done via these tools be shared so that information does not become
fragmented and visibility lost.

Information Technology: Emerging Tools

Overview
The transformation in fulfillment of the last 20 years has been enabled by technology.
Innovations in supply chain and ERP software, automatic identification technologies,
communications systems, and Internet functionality have forever changed the way we work.
The good news is that the technology landscape is not stagnant. Innovations continue to
emerge. Software vendors, hardware developers, and users constantly seek the best
combination of technologies for greater fulfillment capabilities through connectivity and
information sharing.
Despite these initial success stories, key challenges must be addressed. Click the arrow to
review some of the key challenges.

Technology costs must decline to make new tools economically feasible.

Equipment issues such as sensitivity and durability must improve.

Suppliers must achieve reasonable return on investment for technology implementation.

Consumer privacy issues must be resolved.

As these issues are overcome, more companies will adopt the technology. The challenge is to
find and implement the right toolsto separate the innovations with the potential to positively
affect supply chain performance and gain widespread adoption from those tools that are
impractical or ineffective. With this challenge in mind, let's look at the technologies that are
emerging today

How can you keep up to date with the most recent developments in supply chain technology?
Click here for a list of Supply Chain Technology Resources.
Supply Chain Technology Resources
Here is a variety of outlets for technology studies, white papers, and industry news that will help
you keep abreast of emerging tools in the supply chain world.
Name

Web Address

Description

Similar sources

Achieving Supply
Chain Excellence
Through
Technology

www.ascet.com

Addresses timely topics regarding

supply chain technology and
fulfillment processes via
whitepapers, case studies, and
vendor profiles.

ARC Advisory
Group

www.arcweb.com

Provides access to ARCs supply

chain technology research studies
and industry news summaries.

RFID Update

RFID Update

Newsletter highlighting breaking

www.aimglobal.org/services
news and analysis pertinent to RFID www.rfidgazette.org
technology and implementations
www.rfidjournal.com

www.reedbusiness.com

Provides links to publications that

address supply chain strategy,
trends, technology, and related
www.cio.com/enterprise/scm/index.html
topics. Relevant titles include
www.inboundlogistics.com
Logistics Management, Purchasing, www.logisticstoday.com
Supply Chain Management Review,
and others.

Reed Business
Information

www.aberdeen.com
www.amrresearch.com
www.forrester.com

Enabling the Supply Chain

Radio Frequency Identification (RFID) No other technology has garnered the attention of
the supply chain industry and the media as has RFID. It is an automatic identification method
intended to improve product visibility and enhance fulfillment capabilities. RFID tags consist of a
microchip and a printed antenna that can be built into labels or embedded into cartons and
product packaging. Unique product identification information, in the form of a universal
electronic product code (EPC) identifying the manufacturer, product category and individual
item, is stored on the tags. The tags are affixed to the pallet, case, or individual product and
read when they pass within proximity of an RFID reader. These tags contain unique identifiers
not found on barcodes, and direct line of sight is not required to read RFID tags.

As of 2005, Wal-Mart's top 100 suppliers were required to tag shipments with RFID labels
(French 2006). Another 200 became involved at the start of 2006. Wal-Mart has deployed RFID
at 117 of its warehouses and in 500 of its stores, and plans to double the RFID-capable store
count by the end of 2007. Similar mandates by the Metro Group, Tesco, Target, and other
retailers have driven the intense focus on RFID in retail fulfillment. While the technology used in
RFID has been available for decades, fulfillment applications were largely conceptual until major
organizations began to develop RFID mandates.

Initial results of RFID implementations have been positive. Wal-Mart reports that out-of-stocks

decreased 16 percent on RFID tagged items and that out-of-stocks were replenished three
times faster on tagged items than on items with only bar codes (RFID Update 2005). LeviStrauss can complete a storewide inventory in 30 minutes thanks to RFID. They expect to
reduce out-of-stocks and enhance customer satisfaction while reducing theft (RFID Update
2006).
Adaptive Supply Chain Networks (ASCN) Efforts are under way to build integrated, flexible
ASCN's that will help companies focus on customer needs and the prevention or minimization of
fulfillment problems (Norek 2006). Adaptive is the ability to respond to and thrive on
unexpected changes as they emerge, not after the fact. Network means that business partners
and their supply chain technology tools work together to provide increased benefits for all
fulfillment partners.
Pervasive Automation As technology advances, we will achieve connectivity via Internetenabled microprocessors that provide digital intelligence for almost every commercial and
industrial product (Pinto 2004). This is possible by pervasive automation, the networking of tiny
controllers in ordinary items to make them smart devices, capable of real-time assessment and
information sharing (Schick 2000). Pervasive automation is viewed as the next big thing in
supply chain management. It could leverage the convergence of technologiesRFID, ASCN's,
wireless communication, event management software, and othersto foster fulfillment
innovation. Not only will we be able to avoid disruptions related to equipment breakdowns and
inventory shortages, it will be possible to alter the way items are produced, warehoused, and
distributed (Brody 2005).

Information Technology: Topic Summary

Topic Summary
In this topic, we covered some of the basic issues and options in technologywhat you need to
make technology work, goals, and software solutions. We also touched on emerging tools and
on how they could shape fulfillment in the future. The key points to remember from this
technology overview include:

The primary goals of information technology are to enhance visibility of external

fulfillment processes, enable collaboration with fulfillment partners, develop event
management capabilities, improve decision support capabilities, and automate
processes (when logical).

There are four broad categories of supply chain applicationsplanning, execution,

event management, and business intelligence systems. These systems run on a wide
range of tools, from complex ERP systems to spreadsheets.

Warehouse management systems and transportation management systems help

manage the flow of product within and across the network.

Always be ready for the technology landscape to change. As tools become more
affordable, or as powerful fulfillment partners mandate them, companies will have to
adopt them to stay competitive.

Click Main Menu to select another topic.

Measurement: Introduction
Overview

The fulfillment process plays a vital role in business success because of its impact on company
profitability and market position. Top management expect fulfillment to add to shareholder
valueby reducing the cost of distributing products to customers. It is also critical to facilitate
sales through differentiated fulfillment performancefaster transportation service, innovative
warehouse performance, greater visibility, and other strategies that we have discussed
throughout this course.
But how can an organization be sure that their fulfillment processes are performing as expected
in the pursuit of competitive advantage? The only way is to measure: to develop a metrics
program, set targets, and measure performance against targets on a regular basis. Targets
should measure whether the three goals of fulfillment are being achieved.
This topic focuses on the important role of measurement in the fulfillment process. We will
address the elements of a metrics program and look at measures that work for each fulfillment
goal.

Meeting the requirements of the customer for on-time and complete orders

Meeting customer requirements at the lowest possible total fulfillment cost

Achieving customer service and cost goals while earning the highest possible return
on assets invested in fulfillment operations

Measurement: A Metrics Program

Measurement Guidelines
Given the data crunching capabilities that we have at our fingertips today, the natural tendency
is to want to measure every possible aspect of fulfillment and create very detailed reports. The
problem? Everyone is so busy they have limited time to delve into these documents. Little time
is spent trying to understand performance, let alone trying to improve it.
To make the most of fulfillment performance metrics, organizations need to follow some basic
guidelines about metrics:

Keep the process straightforward

Measure only what is truly relevant, not every possible metric. Smart organizations limit
themselves to monitoring six to eight key metrics that effectively capture the key issues
in their fulfillment processes.

Use measures that are logical and well-constructed

Metrics must reflect fulfillment performance and make sense to people. Everybody has
to agree upon the meaning, calculations, interpretations, and targets.

Systematically collect and analyze fulfillment outcomes

You cant measure performance sporadically and expect to make improvements. Use
well-established, effective processes like scorecarding to monitor performance across
your fulfillment processes. (Well discuss scorecarding next.)

Evaluate the true cost of achieving your fulfillment results

Its not enough to set your customer service levels, you have to monitor and control
fulfillment expenses. Activity-based costing (ABC) is a logical method for understanding
and improving the financial impact of your fulfillment processes. Youll find a quick
overview of ABC in a few minutes.

How do you know if youre on the right track with your metrics? Click here for Ten
Characteristics of Good Measures

Ten Characteristics of Good Measures

The following guidelines will help you develop more effective metrics (Keebler et al. 1999)
A good measure

Description

Is quantitative

The measure can be expressed as an objective

value

Is easy to understand

The measure conveys at a glance what it is

measuring, and how it is derived

Encourages appropriate behavior

The measure is balanced to reward productive

behavior and discourages game playing

Is visible

The effects of the measure are readily apparent to

all involved in the process being measured

Is defined and mutually understood

The measure has been defined by and/or agreed

to by all key process participants (internal and
external)

Encompasses both inputs and outputs

The measure integrates factors from all aspects

of the process measured

Measures only what is important

The measure focuses on a KPI (key performance

indicator) that is of real value in managing the
process

Is multidimensional

The measure is properly balanced between

utilization, productivity, and performance, and
shows the tradeoffs

Uses economies of effort

The benefits of the measure outweigh the costs of

collecting and analyzing the data

Facilitates trust

The measure validates the participation among

the various parties

Scorecarding
Performance scorecarding is the process by which companies develop and maintain reports on
the costs and service quality of their fulfillment operations. These reports, presented in the form
of scorecards or dashboards, provide an up-to-date status of an organizations fulfillment
performance. Scorecards can be developed for individual processes as well as for overall
performance of the fulfillment network. For example, transportation scorecards are widely used
to monitor a carriers ability to meet key requirements, like damage rates, on-time delivery
percentages, and billing accuracy.
Performance scorecarding provides a number of valuable benefits to the people managing
fulfillment processes. Click the arrow to review some of these benefits.

Scorecards provide a logically organized, consistent, composite report regarding

performance over the desired timeframe (daily, weekly, monthly).

The tool allows managers to prioritize key metrics and objectively evaluate the success
of fulfillment strategies and processes.

The results can be usedin support of future purchase decisionsto quantitatively

compare suppliers, carriers, third-party logistics providers, and fulfillment operations.

Scorecards are easy to use and provide benchmarking data that can help pinpoint
improvement initiatives.

The process facilitates frequent, structured communication across the fulfillment

network.

Some organizations are taking a holistic look at their fulfillment operationslooking at the whole
rather than the partsthrough a scorecarding innovation called the balanced scorecard. We
look at these "balanced scorecards" next.

Balanced Scorecards
The value of the balanced scorecard approach is that the company and its supply chain
partners have an incentive to look at a much broader picture of performance. This includes
measures across a variety of areas that represent both short-term and long-term performance.
The balanced scorecard involves an integrated set of outcomes. All are important to ensure that
the fulfillment network is performing at peak levels. As the name implies, the goal is "balanced"
performancenot to excel in certain areas to the detriment of others.
Four equally important types of outcomes should be measured regarding fulfillment. Click on
each of the scorecards for more information.

Activity-Based Costing
Activity-based costing (ABC) is a way to understand and control costs. ABC provides
companies with accurate and relevant cost information necessary to support sound business
decisions. It helps determine the financial impact of specific fulfillment processes, identify
opportunities to improve efficiencies, and develop new fulfillment strategies. Given these
capabilities, ABC is being adopted into many aspects of fulfillment operations. The object is to
understand more precisely what the true costs are of serving selected customers or performing
certain activities.

ABC helps organizations build a realistic cost model of their operations. Let's walk through an
example of ABC for transportation.
The premise of ABC is that the demand for a companys outputs gives rise to the need for
activities which, in turn, use resources to complete those activities.
ABC involves two primary procedures. First, we need to trace the use of resources to the
activities that consume the resources. This will help us determine the cost of performing an
activity. Second, we want to identify the outputs that require activities to be completed. This
allows us to accurately link the activity costs to the products, services, or customers that made
the activity necessary. Ultimately, we are trying to understand what costs are incurred and what
causes them to be incurred so that we can plan appropriately, price products and services
correctly, and target improvement initiatives effectively.

Measurement: Customer Service

The First Goal: On Time, Complete Orders

Throughout the fulfillment process organizations focus on positioning resources such as

inventory and capacity to meet customer demand in a timely, cost-effective manner. This links
directly to the first goal of fulfillment: meet the requirements of customers for on-time and
complete orders. It is very clear what needs to be measured in terms of customer service. We
should not overcomplicate it.
As the graphic reveals, it all starts with having the right product available and the right fulfillment
processes in place. They are the key determinants of your ability to provide perfect orders and
keep those customers coming back for more. If you think about it, thats why so much emphasis
is placed on understanding demand and developing a capable fulfillment network.
While you can measure customer service with a wide variety of metrics, well focus on the three
primary key performance indicators (KPIs) shown in the graphic. These KPIs are quantitative
measures related to product availability, timeliness, and correctness of orders. Well also touch
upon perfect orders. For each measure, we will review the issue being evaluated, explain the
data requirements and calculations, and provide guidelines for interpreting outcomes.

Product Availability
For many industries, product availability is the fulfillment outcome of greatest significance.
Organizations emphasize this issue for one simple reason. If you dont have the right product
available when a customer places an order, you may encounter major problems. Backorders,
expedited transportation, unhappy customers, and lost sales are costly outcomes of not having
product available to fulfill demand. Just look at the missed opportunities that production and
fulfillment delays have caused for gaming systems like Xbox 360, PlayStation 3, and others.
Organizations monitor product availability via the fill rate: the percentage of times items are filled
from inventory when the customer requested them. Fill rates are calculated using this formula:
Fill rate % = (Total ______ filled Total ______ requested) x 100
Note that we left some detail out of the formula (the blank lines). That is because fill rates are
measured at multiple levels. Typically, organizations analyze fill rates by order, by line items in
the order, or by number of units or cases in the order. (Click here for Fill Rate Examples.)
It is important to carefully evaluate the best way to measure this key fulfillment outcome for your
company. If you fill small, low complexity orders (an Internet retailer whose customers purchase
one or two items at a time), order fill rate is a good metric. In contrast, if you deal with a wide
variety of goods in varying volume orders (consumer product goods manufacturers fulfilling
retailer orders), you should look at line item and unit fill rates to effectively assess product
availability.
So what is a reasonable fill rate? The obvious answer isthe higher, the betterbut that is
unrealistic. Think back to some of the cost tradeoffs that we discussed previously. To achieve a
near perfect fill rate percentage would require a disproportionately high level of inventory. The
related inventory costs would offset the additional sales. Thus, organizations must be selective
and set the highest fill rate goals for their most important productstheir high volume, high
profit items. These items are critical to customers operations and success. Your fill rates need
to keep them satisfied and prevent customers from seeking out alternate sources to fulfill their
demand.
Fill Rate Examples
An electronics distributor receives 10 orders on Monday and attempts to fill them from existing
inventory. The orders request up to 10 different items (also known as "lines on the order") and
1,000 units.

Units
Ordered

Order

Units Filled

Lines
Ordered

Lines
Completely
Filled

100

50

100

60

80

80

1,000

1,000

50

45

200

200

100

90

500

250

1,000

1,000

10

10

10
Total

50

50

3,180

2,825

36

28

Fill rates:
Based on cases filled

2,825 3,180 = 88.8%

Based on lines filled

28 36

= 77.8%

Based on orders filled

5 10

= 50.0%

As you can see, the fill rate based on the number of cases ordered is solid, over 88 percent. On
the other hand, the fill rate based on the number of orders filled completely is miserable, only 50
percent. Especially problematic are orders 1, 2, and 8 where less than 60 percent of the units
were filled.
The situation determines which measure is most appropriate. If customers are not concerned
about being shorted a few cases here and there (orders 5 and 9), then the fill rate based on
cases would be an acceptable measure. However, if customers find it frustrating and
bothersome to be shorted on part of their order, then it is better to measure percent of orders
filled completely.

Timeliness
Throughout the Basics of Fulfillment course, the concept of timeliness has been highlighted as a
key to successful fulfillment. The time required to process and fill orders, transport goods, and
perform other fulfillment functions has an impact on your company's ability to respond to
customer requirements. Each day that can be trimmed from the fulfillment process saves money
through reduced inventory and lower warehousing costs. In addition, faster fulfillment lessens
the chance for things to go wrong, such as stock-outs, product damage, or obsolescence.
Speed: Order cycle time (OCT) is the way we measure speed. OCT is the elapsed time,
measured in hours or days, from the placement of an order by the customer until the order is
received. Average OCT is calculated as follows:
OCT average = Total days required to fill orders Total number of orders

Consistency is also critical. It would be better to have an average OCT of 6 days plus or minus
0.25 days than to have an OCT of 5.5 days plus or minus 2 days. Customers can better plan
their requirements and activities when OCT variance is minimized. Here is the calculation:
OCT variance = [Sum (OCT per order OCT average)2] Total number of orders

On-time delivery is also considered a key aspect of timeliness. The vision is 100 percent ontime deliveries. Most customers set 95 percent as a minimum acceptable level of on-time
performance with goals of 98 percent or above. Lower performance levels indicate serious
service failures whose causes must be identified and eliminated. On-time delivery is calculated
as follows:
On time % = (Number of on-time deliveries Total number of deliveries) x 100

Organizations also find it useful to evaluate the individual components of order cycle time. Most
often, this involves an analysis of the time required to deliver goods to customer locations.
Transit time average and variance are calculated the same way OCT is calculated.

Correct Orders
The key to customer service is to fulfill orders correctlygiving the customers what they actually
ask for. It is useless to minimize order cycle time and provide 100 percent fill rates if you end up
sending the wrong thing. It is costly and time consuming to deal with fulfillment errors: the item
may need to be returned and restocked while the correct items are picked and reshipped. In the
meantime, the customer may run out of stock and lose sales.
To avoid order fulfillment problems, organizations are focusing on the quality of warehouse
operations. First, product needs to be received and replenished properly. Then, the order
picking processes must promote accuracy. Ultimately, what goes out the door must be exactly
what the customer ordered in the quantity requested. Accuracy is calculated using this formula:
Order accuracy % = (Units correctly picked Total units picked) x 100
Order error rate % = 100 Order accuracy %

Ideally, you are 100 percent accurate when filling customer orders. In reality, perfection is a
journey, a goal that drives fulfillment networks. A Warehousing Education and Research Council
study of suppliers to grocery retailers says that overall order accuracy levels are 94.2 percent.
Not bad, until you learn that the average order accuracy goal is 97.1 percent. Grocery retailers
are doing well, but falling short of their own industry's targets.

Perfect Order
Remember those seven rights of fulfillment? If a perfect order is to be achieved, you have to hit
the target on every issue. However, it may be difficult to assemble data regarding each of the
seven rights for every order. Most companies measure just a few performance indicators to
determine if an order is filled perfectly. Heres a reasonable checklist to determine if a perfect
order has been achieved:

Was the order filled accurately?

Was a 100% fill rate achieved?

Was the order delivered on time?

Was the order received damage-free?

Was proper information provided to the customer (like, Advanced Shipping Notification)?

If the answer to any of the questions is No, then your customer will not be happy and you do
not have a perfect order.

Perfect Orders: Calculating Perfect Order Percentage

In addition to tracking elements of a perfect orderon-time percentage, fill rateit is useful to
monitor overall perfect order percentage, or, POP. The formula is simple: multiply the results of
whichever perfect order KPIs you track. For example, let's assume that these are your results
from last month:
KPIs
Was the order filled accurately?
Was a 100% fill rate achieved?
Was the order delivered on time?

Results
95%
93%
96%

Measurement: Fulfillment Cost

The Second Goal: Lowest Total Fulfillment Cost
Although customer service is a major concern to organizations, management cannot focus its
attention on service apart from other outcomes. The second goal of fulfillmentmeet customer
requirements at the lowest possible total fulfillment costreminds us to keep things in balance.
You can spend a lot of money providing customer service that may not affect customers future
purchase decisions. So, we have to control and reduce costs where possible.
Why are total fulfillment costs so important? Click the arrow to see why.

Fulfillment costs are a significant part of the company's overall cost structure.

Since fulfillment costs have such magnitude, they are candidates for reduction and
elimination. For example, redundant processes and activities can be eliminated and
inventories reduced.

Many experts feel that fulfillment costs are one of the few remaining major cost centers
in a business where it is still possible to save large sums of money.

The total cost of fulfillment, on a relative basis, varies dramatically from industry to industry. The
graphic provides some example products and highlights the relationship between product value,
weight, and bulk to fulfillment costs as a percentage of sales.
Regardless of whether your fulfillment costs are less than one percent of sales or 40 percent, an
opportunity exists to reduce them. Even the pharmaceutical industrywhere fulfillment costs
are a low percent of revenuespends large absolute amounts of dollars on fulfillment
operations. While pharmaceutical firms put a priority on customer service, they also pay close
attention to reducing the total dollars spent on fulfillment.

Cost Per Order

Companies should track fulfillment costs versus goals, and benchmark whenever possible.
Because there are few industry-wide cost numbers to review, companies should compare their
own performance versus past performance and against other supply chain partners. The

insights gained can be used to as the basis of cost reduction initiatives.

One of the most frequently used measures of fulfillment cost performance is the cost to deliver
an order to the customer. An "order" might include anything from one item to hundreds of
different items, so it can be difficult to compare fulfillment costs per order among firms. For most,
"order" is a basic unit of work associated with the fulfillment process.
Most organizations focus on their average cost per order:
Average cost per order = Total fulfillment costs Total number of orders

Average cost per order is a useful diagnostic of how well the organization is managing the
fulfillment process. Low cost per order indicates that management is effectively controlling labor
cost per hour, transportation expenses, overhead, and other fulfillment costs. High cost per
order may indicate productivity problems, poor process design, or lack of cost control.
This strategy works well if your customers place similar orders that require standard processing.
However, if the size and complexity of customer orders varies, it would also be valuable to
assess cost per order using the Activity-Based Costing (ABC) process. Resource costs are
traced to the activities performed to fulfill orders, including transportation, handling, warehousing,
order processing, inventory, and overhead. Then, these activity costs are assigned to the
customer orders that consume the activities.

Cost Per Unit

Cost per unit is very similar to the cost per order measure, but it looks at a common "unit" as a
base for comparing costs. A common unit of measure for many consumer firms is a "case" of
product. For example, cereal, depending on its characteristics, often comes packed either 12 or
24 boxes to the case. The case is the basic unit used by retailers, so it is logical to use it for
determining and evaluating fulfillment costs.
Average Cost Per Unit = Total Fulfillment Costs Total Number of Units

For example, a cereal manufacturer might look at its total fulfillment costs for the year and divide
by the number of cases sold to compute the fulfillment cost per unit. Of course, every company
has its own appropriate "unit." If a hardware store sold flagpoles, and a typical order was for just
one or two flagpoles, then the right unit for cost comparison would be "fulfillment cost per
flagpole." For paper towels sold only by the pallet, the right unit for cost comparison would be
cost per pallet.
Fulfillment cost per unit is an excellent way to monitor fulfillment costs because you can track
the costs over time and evaluate trends in relation to how the fulfillment process operates. For
example, if a light bulb manufacturer found that their fulfillment cost per case had been rising by
five percent a year over the past two years, they should begin to examine all phases of the
fulfillment process to find out what happened.
Most companies set strategic goals for incrementally lowering their fulfillment cost per unit over
time. A health care company directed their key fulfillment managers to reduce per unit fulfillment
costs by four percent every year. This became an extreme challenge after a few years, and it
forced the managers to continually look for ways to manage the fulfillment process with new and
more efficient processes each succeeding year.

Measurement: Return on Assets

The Third Goal: Highest Possible Return on Assets

Fulfillment operations are not cheap (unless you are delivering digital goods via the Internet). A
significant investment of capital is required to build the capacity and capabilities to execute
fulfillment processes. Somebodysuppliers, customers, or 3PL providershas to provide key
assets ranging from trucks and rail cars to inventory, warehouse facilities, and technology.
Otherwise, the product cannot flow across the network to fulfill customer demand.
Were talking about thousands of dollars to buy delivery equipment, millions of euros to build
regional distribution centers, and hundreds of millions of renminbi to stock a major retailers
shelves. So, companies cannot spend their limited resources to purchase fulfillment assets
without considering the rate of return on this type of investment. This is the final goal of
fulfillment: achieve customer service and cost goals while earning the highest possible return on
assets invested in fulfillment operations.
While it is important to create a fulfillment network that provides great service and operates at a
low cost, total cost is always an issue. Thus, you need to monitor the return on assets (ROA).
That is, the return you get on your fulfillment assets. ROA is calculated as follows:
Return on Assets = Net Income Total Assets

In this topic, we focus on the return on fulfillment assets. How is this done? We explore that next.

Associating Revenue with the Fulfillment Process

The challenging aspect of return on asset (ROA) measurement is to associate revenue with the
fulfillment process. Some companies "charge" each product or division for their fulfillment
services based on the level of service desired. The charge is then looked at as the revenue,
which is then compared to the fulfillment costs to calculate a profit. Once profit is calculated, it
can be compared to the level of dollar investment in fulfillment assets to determine the ROA, or
return on assets. This analysis may suggest several things:

The company is doing well; the dollars invested in fulfillment are earning a return similar
to dollars invested in other projects.

Revenues generated by fulfillment are not sufficient to justify the level of cost or
investment, that is, the ROA is low.

The costs are out of line with the level of revenue and investment, thus driving ROA
below acceptable levels.

If it turns out that internal ROA of current or proposed fulfillment operations is below an
acceptable level, the company must explore strategies to fix the situation. Todays preferred
strategy is to outsource parts of the fulfillment process and pay for the services of a 3PL
provider. While this increases variable operating costs, it does dramatically reduce investment in
fulfillment resources and enhance ROA. Of course, you have to make sure that you are not
overpaying for the services and that the 3PL providers service levels are up to par.

Measurement: A Model for Bringing It All Together

How do these measures of fulfillment interact to support profitability? The Strategic Logistics
Profit Model provides insights into the financial impact of fulfillment processes. It helps us
understand how strategic improvements lead to good outcomes like improved sales, reduced
expenses, and reduced capital expenditures. In turn, those outcomes have a positive impact on
the financial health of the company.

Measurement: Case Study: Putting Fulfillment Metrics to

Work
Patrice Roy is doing her best to meet the shipping deadlines at her distribution center, answer
employee questions, and respond to store rush orders. In the midst of another hectic day, she
sits down for five minutes to catch up on e-mail. Here we go, says Patrice to nobody in
particular when she sees an e-mail from the regional vice president, three levels above her
position. Patrice clicks on the e-mail:

Measurement: Topic Summary

Topic Summary
In this topic, we looked at ways to measure performance based on the three goals of
fulfillmentcustomer service, costs, and return on fulfillment assets. The only way to know if
your company is meeting its goals is to measure. Key points to remember include:

Service is crucial to customer satisfaction and repeat business. Fulfillment performance

is measured in terms of product availability, timeliness, accuracy, and perfect
orders.

Fulfillment costs must be contained to ensure long-term competitiveness. Organizations

monitor total fulfillment cost, cost per order, and cost per unit.

To figure out return on fulfillment assets, you have to know what fulfillment activities
cost; and you have to determine the financial impact of fulfillment processes.

Two key tools support effective performance measurements. They are:

Activity-based costing This approach helps organizations understand what causes

costs to reach their reported levels and then analyzing the "drivers" of the costs.

Scorecarding Maintaining key reports on the cost and service quality of fulfillment
operations provides up-to-date status of fulfillment performance.

Should you need to dig more deeply into the metrics area, there is a list of resources available.
These resources will provide additional insight into the measurement process and other
valuable fulfillment metrics.
Click Main Menu to select another topic.

Conclusion
Course Summary
fulfillmenta process involving the movement and storage of materials, products, and
information from point of origin to the final customerin a way that satisfies the customer at the
lowest cost, producing the highest value for the customer.
Traditional vs. leading edge. A global conglomerateand a single customer ordering
from home. Private fleets and ocean-going ships. Stacked to the ceiling on steel

rackingor in one door and out the other. Enterprise-wide information systemsand a
spreadsheet.
Fulfillment brings all this together, aiming for the perfect order: the right product, to the right
customer, at the right time, to the right place, in the right condition, in the right quantity, and at a
reasonable cost.
In fulfillment, perfect means doing everything right the first time. And when that happens, you
achieve the three goals of fulfillment.

Conclusion: Course Digest: Concepts & Techniques

All aboutFulfillment
Definition
fulfillmenta process involving the movement and storage of materials, products, and
information from point of origin to the final customerin a way that satisfies the customer at the
lowest cost, producing the highest value for the customer.
Three goals

Meeting the requirements of the customer for on-time and complete orders The
customer is the focus of any good business and, therefore, is the driving force behind
any fulfillment process. If a company can meet and exceed the customer's goals for
fulfillment, it will often enjoy a strong competitive advantage.

Meeting customer requirements at the lowest possible total fulfillment cost

Fulfillment activities are some of the biggest controllable expenses in a business. How
big? In some cases, 20 percent of sales. That clearly merits close attention. By carefully
managing fulfillment processes, companies can become a low-cost provider to their
customers, which further enhances their competitive standing. The grocery industry is a
good example. A penny saved on the distribution of a box of cereal to the retail grocer,
if passed on to the grocer, could raise the grocer's net profit by as much as 20 percent,
given the fact that grocery margins are only about 1.5 percent of sales.

Achieving customer service and cost goals while earning the highest possible
return on assets invested in fulfillment operations Finally, attention must be paid
to the efficient use of assets used in the fulfillment process. Warehouses, transportation
vehicles, handling equipment, computers, and officesall are major assets employed to
achieve fulfillment goals. While high levels of service and low operating costs can be
achieved by huge investments in fulfillment assets, the overall return on those assets
may not be favorable. The object is to balance investment and return.

Seven rights of Fulfillment

All aboutNetworks
Design process

Assess suitability of existing facilities.

Determine the total number of nodes.
Determine the location of each node.
Assign products and customers to each node.
Determine mode of transport between nodes (establish links).

Select carriers.

Design strategies

Direct store delivery

Distribution center network
Cross-docking
Direct-to-consumer

All aboutTransportation
Decision points

Terms of the sale (and Incoterms)

Modal selection
Carrier selection
Negotiation Rate and contract

Mode comparison
Mode

Strengths

Truck Accessible
Fast & versatile
Customer service
Air

Speed
Freight protection
Flexibility

Water High capacity

Low cost
International
capabilities

Rail High capacity

Low cost

Limitations

Primary Product
Characteristics

Sample Products

Limited capacity
High cost

Move smaller
shipments in local,
regional, and national
markets

High value
Finished goods
Low volume

Food
Clothing
Electronics
Furniture

Accessibility
High cost
Low capacity

Move urgent
shipments of domestic
freight and smaller
shipments of
international freight

High value
Finished goods
Low volume
Time sensitive

Computers
Periodicals
Pharmaceuticals
B2C deliveries

Slow
Accessibility

Move large domestic

shipments via rivers,
canals and large
shipments of
international freight

Low value
Raw materials
Bulk commodities
Containerized
finished goods

Crude oil
Ores / minerals
Farm products
Clothing
Electronics
Toys

Accessibility
Inconsistent service
Damage rates

Move large shipments Low value

of domestic freight
Raw materials
long distances
High volume

All aboutWarehousing
Key activities

Primary Role

Product handling
Product storage
Postponement

All aboutTechnology

Coal/coke
Lumber/paper
Grain
Chemicals

Goals

Enhance visibility of external fulfillment processes

Enable collaboration with fulfillment partners
Develop event management capabilities
Improve decision support capabilities
Automate processes (when logical)

4 types of software solutions

Planning
Execution
Event management
Business intelligence systems

The people buying, installing, and using information systems ultimately determine its success or
failure. Individuals making information technology selection decisions must have reasonable
expectations regarding the technology being considered and consult team members with
operational expertise regarding functionality needs. The people tasked with implementing and
integrating technology need adequate staff and financial resources to complete the work. And,
the day-to-day technology users must be properly trained in the appropriate, accurate use of the
tools.
Process management also plays a role in technologys impact. Organizations must review
existing methods in light of their technology options. The risk of not doing so is that inefficient,
outdated, or unnecessary processes will be automated. Supply chain professionals and their
technology counterparts must also determine how emerging tools can be used to enhance
internal procedures and streamline information flows to fulfillment partners. Standard operating
procedures and goals regarding fulfillment accuracy, productivity, timeliness, and cost also must
be established for technology-enhanced processes. Without them, it would be impossible to
ensure that processes are being performed correctly or generating the desired outcomes.
Technology facilitates effective information sharing when it is based on the open systems
concept to achieve interoperability. Software applications that are based on well-defined, widely
used, nonproprietary open standards require minimal changes to interoperate with other tools.
Data transfer between different applications and systems becomes seamless and there is a
reduced need for data manipulation by each organization.

All aboutMeasurement
10 Characteristics of Good Measures
A good measure

Description

Is quantitative

The measure can be expressed as an objective

value

Is easy to understand

The measure conveys at a glance what it is

measuring, and how it is derived

Encourages appropriate behavior

The measure is balanced to reward productive

behavior and discourages game playing

Is visible

The effects of the measure are readily apparent to

all involved in the process being measured

Is defined and mutually understood

The measure has been defined by and/or agreed

to by all key process participants (internal and
external)

 Encompasses both inputs and outputs

The measure integrates factors from all aspects

of the process measured

Measures only what is important

The measure focuses on a KPI (key performance

indicator) that is of real value in managing the
process

Is multidimensional

The measure is properly balanced between

utilization, productivity, and performance, and
shows the tradeoffs

Uses economies of effort

The benefits of the measure outweigh the costs of

collecting and analyzing the data

Facilitates trust

The measure validates the participation among

the various parties

Formulas: Customer Service

Fill rate % = (Total ______ filled Total ______ requested) x 100
OCT average = Total days required to fill orders Total number of orders
OCT variance = [Sum (OCT per order OCT average)2] Total number of orders
On time % = (Number of on-time deliveries Total number of deliveries) x 100
Order accuracy % = (Units correctly picked Total units picked) x 100
Order error rate % = 100 Order accuracy %
Perfect order percentage = (KPI% x KPI% x KPI% x KPI% x KPI%) x 100 = ______%
Formulas: Lowest Total Fulfillment Cost
Average cost per order = Total fulfillment costs Total number of orders
Average Cost Per Unit = Total Fulfillment Costs Total Number of Units
Formula: Highest Possible Return on Fulfillment Assets
Return on Assets = Net Income Total Assets

Conclusion: References
Information Technology
ARC Advisory Group. 2006. The SCM market expected to grow 8.6% annually: growth driven
by SCE segment. http://www.arcweb.com/C12/News/default.aspx (accessed July 22, 2006).
Autrey, Chad W., Stanley E. Griffis, Thomas J. Goldsby, and L. Michelle Bobbitt. 2005.
Warehouse management systems: resource commitment, capabilities, and organizational
performance, Journal of Business Logistics, No. 2.
Bednarz, Ann. 2004. Grape grower juices up its planning systems. Network World, 14 June: 2122.

Brody, George. 2005. The smart, sensor-based RFID network. Achieving supply chain
excellence through technology (7). San Francisco, CA: Montgomery Research Inc.
Cooke, James A. Software gets friendlier. 2005. Logistics Management, July.
DesMarteau, Kathleen. 2006. American Eagle tackles compliance with integrated IT. Apparel,
February.
French, Anita. 2006. Wal-Mart prods suppliers on RFID. The Morning News, 3 January.
Maloney, David. 2006. More than paper savings. DC Velocity, 4:1 62-64.
Norek, Christopher D. 2006. Adaptive Supply chain networks: the next supply chain summit.
Whitepaper. Atlanta, GA: Chain Connectors, Inc.
Pinto, Jim. Pervasive networks. 2004. AutomationWorld, December.
http://www.automationworld.com/articles/Departments/1038.html?ppr_key=12.2004&sky_key=1
2.2004&term=12.2004 (accessed July 27, 2006).
Premus, Robert, and Nada Sanders. 2005. Modeling the relationship between firm IT capability,
collaboration, and performance. Journal of Business Logistics, 26:1 1-23.
RFID Update. 2005. Gillette, Wal-Mart, Levi, Michelin share RFID results. 27 May.
http://www.rfidgazette.org/2005/05/gillette_walmar.html (accessed July 26, 2006).
RFID Update. 2005. Wal-Mart: RFID reducing out-of-stocks. 25 October.
http://www.rfidupdate.com/articles/index.php?id=977 (accessed July 26, 2006).
Sapient Corporation. 2002. Tackling uncertainty: improving responsiveness with supply chain
event management. Cambridge, MA: Sapient Corporation.
Schick, Shane. 2000. Expert warns of emerging pervasive workplace. Computing Canada, 13
October. 26:21 36.
Taylor, David. A master plan for software selection. 2004. Supply Chain Management Review,
8:1 (January) 20-27.
Tirschwell, Peter. 2004. Planning vs. execution. Journal of Commerce, 5 July: 1.
Totty, Michael. 2006. Technology special report: business intelligence. Wall Street Journal, 3
April: R6.
Trebilcock, Bob. 2002. How smart is your software? Logistics Management, 41:8 (August): 6870.

Measurement
Byrne, Patrick M. and William J. Markham. 1991. Improving quality and productivity in the
logistics process. Oak Brook, IL: Council of Logistics Management.
Coyle, John J., Edward J. Bardi, and C. John Langley, Jr. 2003. The management of business
logistics. Chap. 13: Supply chain performance measurement. Mason, OH: South-Western.

Frazelle, Edward H. 2002. Supply chain strategy: the logistics of supply chain management. 177.
New York: McGraw-Hill.
Gibson, Brian J. 1995. Supplier certification: utilization and value in the purchase of industrial
transportation services. Knoxville, TN: The University of Tennessee.
Keebler, James S., Karl B. Manrodt, David A. Durtsche, and D. Michael Ledyard. 1999. Keeping
score: measuring the business value of logistics in the supply chain. Oak Brook, IL: Council of
Logistics Management (now Council of Supply Chain Management Professionals).
Lapide, Larry. 2000. Achieving supply chain excellence through technology. Vol. 2: What about
measuring supply chain performance?
Vitasek, Kate. 2004-2005. Measuring up: A 12 part series on the 12 Commandments of
successful performance management. www.dcvelocity.com
Whitaker, Jonathan D., Larry Lapide, and Debra Hoffman. 2002. Achieving supply chain
excellence through technology. Vol. 4: Better metrics improve performance.

Transportation
Cosco Logistics. 2006. http://www.coscologistics.de/tools_sub.asp?main=4&subs=2&lang=e
(accessed October 16, 2006).
Coyle, Bardi, and Langley. 2003. The Management of Business Logistics. Mason, OH: West
Publishing.
Gibson, B. 1995. Supplier Certification: Utilization in the Purchase of Transportation Services.
Knoxville: University of Tennessee.
International Air Transport Association. 2006. World Air Transport Statistics. 50th ed. Web
download: http://www.iata.org/ps/publications/9011.htm
International Chamber of Commerce. 2006. Incoterms 2000: The 13 Incoterms FAQs about
the basics. http://www.iccwbo.org/incoterms/faq.asp (accessed October 14, 2006).
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Conclusion: References
Associations & Research Groups
ARC Advisory Group
ARC Advisory Group's website provides access to
ARCs supply chain technology research studies and
industry news summaries.

www.arcweb.com

American Productivity and Quality Center

APQC is a member-based not-for-profit that provides
benchmarking and best-practice research for
approximately 500 organizations worldwide in all
industries.

www.apqc.org/

Center for Advanced Purchasing Studies:

www.capsresearch.org/benchmarking/index.htm

Other sites to visit:

www.aberdeen.com
www.amrresearch.com
www.forrester.com

Benchmark Reports
CAPS Research, working in partnership with its global
network of executives and academics, is dedicated to
the discovery and dissemination of strategic supply
management knowledge and best practices. CAPS
Benchmarking provides cross-industry and industryspecific benchmarks and benchmarks areas of
particular interest.
Council of Supply Chain Management Professionals www.cscmp.org/Website/Resources/APQC.asp
Formerly the Council of Logistics Management (CLM),
the CSCMP is a not-for-profit organization of business
personnel interested in improving their supply chain
management skills. It works in cooperation with private
industry and various organizations to further the
understanding and development of the supply chain
concept.
Procurement and Supply-chain Benchmarking
Association
The Procurement And Supply-chain Benchmarking
Association (PASBA) is currently a free association
of procurement and supply chain organizations within
major corporations. PASBA conducts benchmarking
studies to identify practices that improve the overall
operations PASBA Mission to identify best in class
procurement and supply chain business processes

www.pasba.com/

Supply-Chain Council
www.supply-chain.org
The Supply-Chain Council (SCC) is a global, not-forprofit trade association open to all types of
organizations. It sponsors and supports educational
programs including conferences, retreats,
benchmarking studies, and development of the SupplyChain Operations Reference-model (SCOR), the
process reference model designed to improve users'
efficiency and productivity.
Transportation Industry Benchmarking Consortium http://www.flash.net/~benchmar/tibc.html - anchor1415675
The Transportation Industries Benchmarking
Consortium (TIBC) is an association of
transportation companies. TIBC conducts
benchmarking studies to identify the practices that
improve the overall operations of the members.
WERC Warehousing Education & Research
www.werc.org
Council
WERC is an international professional association for
people involved in the management of warehouses and
distribution facilities. Typical WERC members are
distribution and warehousing professionals who lead,
direct, and manage the efficient flow of information,
materials, and finished goods throughout the supply
chain.

Publications
Achieving Supply Chain Excellence through
Technology
Addresses timely topics regarding supply chain
technology and fulfillment processes via whitepapers,
case studies, and vendor profiles.

www.ascet.com

Reed Business Information

www.reedbusiness.com Other sites to visit:
Provides links to publications that address supply chain
www.cio.com/enterprise/scm/index.html
strategy, trends, technology, and related topics.
www.inboundlogistics.com
Relevant titles: Logistics Management, Purchasing,
www.logisticstoday.com
Supply Chain Management Review, and others.
"RFID Update"
Newsletter highlighting breaking news and analysis
pertinent to RFID technology and implementations.

www.rfidupdate.com

www.aimglobal.org/services
www.rfidgazette.org
www.rfidjournal.com