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Emerald Article: Relationship between logistic service and maintenance costs of warehouses Alberto De Marco, Giulio Mangano

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To cite this document: Alberto De Marco, Giulio Mangano, (2011),"Relationship between logistic service and maintenance costs of warehouses", Facilities, Vol. 29 Iss: 9 pp. 411 - 421 Permanent link to this document: http://dx.doi.org/10.1108/02632771111146323 Downloaded on: 04-04-2012 References: This document contains references to 23 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 1118 times.

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Relationship between logistic service and maintenance costs of warehouses

Alberto De Marco and Giulio Mangano
Department of Production Systems and Business Economics, Politecnico di Torino, Torino, Italy
Abstract
Purpose The purpose of this paper is to prove that maintenance cost of warehouses is correlated to the performance of the logistic business, together with other relevant operational factors. Design/methodology/approach The relationships between indicators of logistic service level performance are examined using a linear regression analysis of a dataset collected from a number of distribution facilities operated by a leading global freight provider throughout Italy. Findings Expenditures in building maintenance contribute to improve the punctuality of deliveries with resulting improved quality of customer service. Research limitations/implications Further research may gainfully generalise the model by examining other geographical areas and longer observation periods. Practical implications It is suggested that logistic buildings have to be maintained not only to preserve the functional and economic value of the asset, but also to strengthen the competitive advantage of the logistic business. Originality/value The business performance is very likely to be inuenced not only by variables related to the business process, but also by non-operational factors, such as warehouse building performance. Keywords Facilities management, Logistics, Maintenance costs, Regression analysis, Warehouses, Distribution management, Maintenance, Italy Paper type Research paper

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Received September 2010 Accepted December 2010

1. Introduction Organisations are typically reluctant to spend in order to maintain built industrial assets. Even in good economic times, the cost of maintaining the building and systems parts of the workplace is considered disliked and unavoidable burden in reaching minimum acceptable standards for the purpose of running business operations (Chew et al., 2004). While appropriate budgets for the maintenance of manufacturing plant and materials handling equipment are considered of vital importance for the business, the maintenance conditions of the industrial building become critical to managers only at the point in time that the obsolescence gap is so large as to be no longer able to support industrial operations, with subsequent impact on the performance of the business ( Jones and Sharp, 2007).
This study is part of a review of life cycle management practices of industrial buildings in Italy conducted by the research group for Engineering Systems and Logistics at Politecnico di Torino. The authors wish to acknowledge the anonymous company for collaboration and permission for publication.
Facilities Vol. 29 No. 9/10, 2011 pp. 411-421 q Emerald Group Publishing Limited 0263-2772 DOI 10.1108/02632771111146323

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Therefore, except for extreme cases of ultimate disrepair and non-compliance with health and safety legislation, it is difcult for organisations to perceive the level of spending on maintaining the building components of industrial facilities as a crucial success factor. Indeed, the issues associated with the relationship between building maintenance and industrial activities are struggling to integrate fully into the business strategy of manufacturing and logistics organisations. However, the increased number of assets to be maintained, escalating built asset maintenance costs in absolute terms and tightening legislation are forcing many companies to re-analyse the role of maintenance in protability, efciency and competitiveness (Cooke, 2003). Above all, this has to concern vertical retailers, distributors, and logistic service providers that do not operate large manufacturing equipment, but rather run a number of core-business warehouse facilities with rising building maintenance costs. Nevertheless, building maintenance does not receive enough management attention because of the belief that the associated costs cannot be easily controlled (Lofsten, 1999). Also, the correlations between maintenance and business performance are not fully explored in either the professional or research literature. With the purpose of lling the research gap and contributing with insights to eld knowledge, the research that underpins this paper is aimed at exploring the links between FM and operational performance. The specic objective is to prove that the cost of warehouse building maintenance is related to the performance of the logistic business, together with other relevant operational factors. This suggests that facility management (FM) professionals within organisations can effectively contribute to enhancing business performance by designing appropriate maintenance strategies and implementing effective maintenance actions to keep warehouses in a satisfactory condition. This statement is inferred from a statistical study of empirical data from a number of Italian warehouses leased by a leading global shipment and logistic service provider. (For the purposes of anonymity, details cannot be stated here.) The paper is structured as follows. The next section is a brief review of existing research exploring the relationships between maintenance and business service level. Then, we discuss the design of the study, the empirical analysis and the main results. Finally, conclusions and practical implications are drawn together with limitations and future research directions.

2. Background research Organisations are becoming interested in examining the relationship between building maintenance costs and the results of operating activities and in afrming the role that improved maintenance management can play in enhancing the organisations ability to compete in a demanding market (Stoy, 2007). To this end, various frameworks are available in the literature for either measuring business performance or assessing the value of maintenance strategies in industrial facilities. However, very few are focused on understanding the impact of maintenance and FM on business operations. The following is a brief review of some of the methods available in these areas of research.

2.1 Assessing the logistics service level performance The are several models to measure the performance of business operations, referred to as the role of operational tasks to reduce costs, drive revenue growth, and enhance the businesss value (Keebler and Plank, 2009). With specic regard to logistics, assessing operational performance is consistent with evaluating the behaviour of the logistic services provided through the measurement of indicators and associated parameters. The primary scope of logistics services is to support manufacturing and distribution tasks by picking items from warehouses and delivering them in a timely manner to end customers with superior service as a source of competitive advantage (Sum and Teo, 1999). In addition, distribution and express logistics operators are required to provide diversied services to provide a seamless delivery process, to track items as they are in transit, and to adjust transportation agreements based on specic customer demands (Damen, 2001). In this context, cost and customer service appear to be the two most common indicators used to assess the effectiveness of logistics systems (Mentzer and Konrad, 1991). In fact, most sets of indicators available in the literature to measure logistic service performance (Rafele, 2004; Amstel and Dhert, 1996; Caplice and Shef, 1994) largely focus on the quality of customer service. In particular, customer satisfaction is a crucial aspect of a logistics service. The arguments in support of satisfaction are simple to understand: satised customers are reported to have higher customer retention rates and to commit a higher share of their category spending to the rm, and are more likely to spread word of mouth (Keiningham et al., 2007). Bookbinder and Lynch (1997) suggest considering customer service in logistics from the perspective of the interval elapsing between the point in time that order is placed and the time that the customer receives the order in other words, punctuality of delivery (which can also be measured as the number of orders delivered on time divided by the total number of orders) is a very important factor of competitive advantage in the logistics industry, because customers are willing to pay more money in exchange for an efcient service (Voss et al., 2005). 2.2 Role of facilities maintenance in logistics businesses This paper seeks to understand whether the logistic service performance is somehow related to the building conditions of the warehouse facilities. So far, little work has been carried out with this specic strategic perspective. However, previous crossway research is available to support our purpose and appropriately dene the notion of maintenance. For example, the eld of FM has denitely witnessed signicant recognition that the performance of facilities is highly dependent on their maintenance (Lavy and Shohet, 2008) and that a proper maintenance service is crucial to ensure good building performance, through a reduction in the adverse effects of breakdowns to maximize the availability of the facility at minimum cost (Sherwin, 2000). The expenditure to keep a building in condition appropriate to its use typically include all direct costs of maintenance resources, such as materials, labour, and tools, as well as the indirect costs associated with management and administration. Ahuja and Khamba (2008) envisage that the FM function is integrated into operations to establish total productive maintenance as a competitive strategy for

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meeting the challenges of a competitive environment. They state that successful organisations need to integrate proactive maintenance initiatives strategically into their operational strategies to boost productivity and performance. Also Cooke (2003) recommends that industrial companies enhance the maintenance function through more planning, control, and integration to business strategy. With specic regard to warehouses, Ling et al. (2008) provide important design requirements for helping warehouse facilities to reap economic benets. In particular, they uncover the role that quality of both the built warehouse product and the FM service plays in achieving high level of satisfaction of the tenant logistics company. Moreover, De Marco et al. (2010) determine the fundamental factors that inuence maintenance costs of logistic buildings and provide benchmark indications for designing efcient warehouses that contribute to enhance the performance of logistic activities. In particular, they indicate that substantial maintenance cost reduction can be achieved through control of select strategic factors, such as location and age of the warehouse, as well as the volume of transiting freight volumes. However, while the relationship between the warehouse characteristics and the cost of maintenance is understood, little work has been carried out so far to assess any possible connections between the logistic service level and maintenance in distribution warehouses. Here, we explore this type of relationship through an empirical examination of the most important factors that might be linked to the logistic service level.

3. Empirical analysis 3.1 Case study This paper studies the operational performance indicators of the logistics service level supplied by the Italian local warehouse facilities of a leading global logistic service provider (GLSP) committed to the freight transport, handling, storage and safe and timely delivery of parcels, documents and freight items throughout the world. In particular, we study the outbound logistics service level provided by a number of local warehouses that serve the country in a capillary fashion. In the case company, the outbound logistics service level is dened as the percentage of items not delivered on time to end customers, so that 0 per cent is the best target for the logistics service level to communicate a zero-defect policy. The GLSP logistics operations run as follows. Customers place shipment orders through a line or web front desk customer care service. Accordingly, a van eet leaves the local warehouse in the afternoon to pick the customers items at their locations, and return them to the trip-originating local storage. Here, all items are loaded into a large truck addressed to the national consolidation centre. Once this consolidation hub is reached, items are unloaded, sorted by destination, re-loaded onto trucks, and shipped to the assigned local nal warehouses. There, items are received early in the morning, re-sorted and re-loaded onto small vans to reach the end customer locations. Timely deliveries are of the greatest importance to both the GLSP and its customers in order to foster competitive advantage. In this context, warehouses play a leading role in assuring punctuality as one of the most crucial indicator of logistics service level performance.

In particular, local warehouses assist the performance of the outbound logistics service throughout the execution of inbound logistics activities, such as receiving, unloading, storage, and sorting. Similarly to most global logistics service providers, the GLSP leases the warehouse buildings and contracts the FM function to a sole national specialist company while maintaining a light in-house staff to manage the contracted services, to control the fullment of contract requirements, and to avoid the risk of opportunistic behaviour on the part of the service agent (Hui and Tsang, 2004). The warehouses are specically tted for the case companys logistic purpose: they are designed, constructed and equipped based on the GLSPs specications and direct project management efforts. The contractor executes preventive maintenance services and emergency repair actions upon request from the tenant on all building components (e.g. ceilings, oors, doors, windows, etc.), logistics-related elements (e.g. receiving and shipping docks, gates, etc.), and electrical, plumbing and HVAC systems (De Marco et al., 2010). In this study, we do not include the costs of maintaining the plant equipment (e.g. the automated storage and retrieval system). Variability of both the outbound service level and building maintenance costs is observed among the various warehouses, so that a study conducted to understand their relationship is developed. 3.2 Study methodology We rst carried out an exploratory analysis of data collected from sample warehouses. Then, we completed a regression analysis to determine a linear model that was able to describe the independent variable and to determine out the factors affecting the response variability. Linear regression is a widely used analysis tool for investigating managerial performance factors and for reecting the relationships between variables within datasets. 3.3 Exploratory data analysis Data were gathered during the year 2009 from 78 warehouse facilities located throughout Italy, with a total 273,795 m2 of usable oor space. The size of warehouses is heterogeneous and ranges from 608 m2 to 16,172 m2, with a median size equalling 3,510 m2. To describe operations and measure the logistics service performance, several indicators with associated parameters have been considered (Table I). First, freight trafc is separated into two different ows, i.e. incoming (II) and outgoing items/m2 per day (OI). Incoming volumes range from 0.31 to 2.05 items/m2 per day with the mean equalling 0.77 items/m2 per day; outgoing item trafc ows range from 0.11 to 4.77 items/m2 per day, with the mean being 0.76 items/m2 per day. Second, the vehicles-to-docks ratio (V/D) is recorded to indicate the number of both vans and trucks used per loading dock available at the warehouse. In other terms, V/D is a proxy description of the relation between the service punctuality and the design characteristics of the warehouse from the point of view of logistic operations. Here, a high ratio indicates under-capacity of loading/unloading operations, while a low value means that there are more shipping docks than necessary. The V/D ratio ranges from 0.25 to 21.25, with a mean equal to 1.34 vehicles per dock.

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Independent variables Incoming Items (items/m2 per day) Outgoing items (items/m2 per day) Vehicles/docks Customer satisfaction Inbound service level (per cent) Productivity Items/h Maintenance costs Dependent variable Outbound service level (per cent)

Acronym II OI V/D CS ISL PROD I/h MC OSL

Lower quartile 0.31 0.11 0.25 286.00 3.22 32.56 9.86 0.02 3.12

Median 0.77 0.76 1.34 1,885.00 6.19 60.61 32.38 1.01 6.00

Upper quartile 2.05 4.77 21.24 4,748.00 13.21 85.21 278.57 4.62 11.98

SD 0.40 0.60 3.68 948.92 0.02 9.16 58.88 1.31 0.02

416

Table I. Indicators of outbound service level performance

Then, the level of customer satisfaction (CS) is measured. CS is a parameter dened as the number of items delivered over the number of claims made by customers. This is an indicator linked to the perceived quality resulting from the comparison between predicted and perceived service. CS ranges from 286 to 4,748 items per claim, with an average value of 1,885 items per claim. Also, the analysis includes the inbound logistics service level (ISL), dened as the percentage of items not picked on time. ISL ranges from 3.22 per cent to 13.21 per cent with a mean value of 6.19 per cent. Another factor considered is the productivity according to two different points of view. The rst is the pick-up and delivery productivity (PROD), referred to as the ratio between the total number of items moved and the number of vehicles. In other words, this is a descriptor of the size and utilisation of the vehicle eet. The median pick-up and delivery productivity is 60.61, with values ranging from 32.56 to 85.21. The second is the handling productivity (I/h), which is the ratio of the total number of items managed to the amount of item-handling working hours. In other terms, this indicates the efciency of human resources employed at the storage oor. The median handling productivity is 32.38, with values ranging from 9.86 to 258.87 items per hour. Finally, we measured the costs of building maintenance (MC). MC ranges from e0.02/m2 to e4.62/m2 of usable oor area, with the median value equalling e1.01/m2. During the recording period, maintenance costs were constant with no ination adjustments (see Table I). To explore the relationship of business performance to warehouse building maintenance, the analysis focuses on understanding which ones of the indicators above are relevant factors (independent variables) to the outbound service level (OSL), assumed as the dependent variable. OSL shows values from 3.12 per cent to 11.98 per cent of items not delivered on time to end customers, with a mean worth of 6.00 per cent. This means that a zero per cent OSL represents the ideal quality of service with no defects. A rst statistical analysis on the OSL dependent variable shows a non-normality of records (Figure 1). Therefore, a logarithmic transformation is applied to the outbound service level data, with a minus sign to get positive records for better interpretation. The

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Figure 1. Probability plot of the outbound service level variable

transformed variable results to be normal distributed (Figure 2), so that it can be used as the response factor of the linear regression model. 3.4 Results of regression analysis Table II shows the results of the regression analysis performed with Minitab Software tool. The columns report, respectively, the estimate of the regression coefcient, the standard error of the coefcient estimate, the value of the t-statistic, and the p-value with associated level of signicance (see Appendix). These results suggest that OI, ISL, PROD, I/h, and MC are signicant factors of the behaviour of the outbound service level (OSL).

Figure 2. Probability plot of the 2 ln(outbound service level) variable

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Incoming items/m2 Outgoing items/m2 Vehicles/docks Customer satisfaction Inbound service level Productivity Items/h Maintenance costs/m2 Multiple R 2 Adjusted R 2

Acronym II OI V/D CS ISL PROD I/h MC

Estimate 0.05690 2 0.15199 0.00199 0.00005 2 3.634 0.01247 0.00106 0.05457 0.428 0.361

SE 0.06470 0.04543 0.007094 0.00003 1.602 0.00283 0.00051 0.02521

t-value 0.88 2 3.35 0.28 1.61 2 2.27 4.4 2.11 2.16

p-value 0.382 0.001 0.779 0.113 0.026 0.000 0.039 0.034

Signicance
**

418

* *** * *

Table II. Results of regression analysis

Notes: *Signicant at the 0.01 level; * *signicant at the 0.001 level; * * *signicant at the 0.000 level. Other values signicant at the 0.1 level

In particular, the negative inuence of OI on the transformed response variable (-ln(OSL)) indicates that a high trafc intensity determines a high number of late deliveries, and vice versa. This proves that it is important to design warehouses with appropriate oor space requirements to avoid high freight trafc intensity that might jeopardise the logistics service level performance. Similarly, a late pick-up service, referred to as ISL, is a determinant factor of a late outbound delivery service (OSL). This reafrms a rather intuitive mental model that an efcient inbound service is likely to contribute to an efcient outbound service, due to the fact that these are strictly linked along the process line. PROD shows a perfect relationship with 2 ln(OSL), in the sense that a high productivity of operations assures a timely outbound service level. In other terms, through appropriate sizing of vehicle eets and efcient planning of network routing, it is possible to achieve a better delivery service performance. Intuitively, the handling productivity (I/h) is also a relevant driver of a punctual delivery service, because an efcient handling process carried out by the human resources is more likely to lead to more on-time services. The linkages presented so far conrm expected behaviours. In contrast, the relationship between maintenance and operations performance, which typically is not considered to be relevant by industrial players, here proves to be signicant. In particular, maintenance costs per square meter positively inuence 2 ln(OSL), meaning that high maintenance costs contribute to diminishing the number of late deliveries, and vice versa. Conclusions As anticipated by managerial thinking, our study demonstrates that a few variables that are inherently associated with the operational characteristics of the logistics business are signicant factors in improving the outbound service level for a logistics provider: the lower the outgoing freight volumes, the lower the inbound service level, the higher the pick-up and delivery productivity, and the greater the handling productivity, the higher the maintenance cost, the better the service level performance (i.e. reduced number of late deliveries).

In contrast, incoming items per square meter, vehicles/docks, and customer satisfaction do not appear to be signicant factors. In fact, the results show that the vehicle-to-dock ratio in a distribution warehouse does not affect service punctuality: however, we have found that the vehicle eet is a relevant factor, so we can deduce that the number of docks in a warehouses does not inuence the OSL. Also, customer satisfaction, as a measure of perceived service by customers, does not affect the actual outbound service level. In conclusion, this means that to improve the logistic business performance it is important to: . appropriately design the layout of the warehouse, considering that space assigned to incoming freight does not inuence the delivery service, whereas space for outgoing trafc is a relevant factor; . effectively execute vehicle routing and to determine the proper number of vehicles; and . efciently use the productivity of human resources. In addition, an original nding is that maintenance cost is a signicant driver of the outbound service level performance. As a practical implication, we recommend that warehouse managers should avoid considering maintenance expenditure merely as a necessary evil (Moua and Russell, 2001), but rather as a supporting system for the purpose of improving the performance of logistics operations. Through the denition of an appropriate level of FM spending, the building components of the logistics facility can be maintained not only to preserve the functional and economic value of the asset, but also to assure the conditions for running a competitive business. However, this work has some limitations. First, the implications of the model might not be applicable in other geographical areas, so any general extension of the lessons learned will need a similar analysis of data gathered in countries other than Italy. Second, due to the dynamic and changeable nature of trafc volumes, it would be better for data to be recorded over a longer period of time rather than just one year. Indeed, the fact that the year 2009 was a period of low trafc because of the global economic crisis permits us to state that our ndings are corroborated. Developing our analysis in a period of high trafc ows would have resulted in even more signicant relationships. Finally, the regression analysis R 2 values suggest that a percentage of the variation is still unexplained. It is to overcome these issues that we are contemplating future research. Despite its limitations, this work is still proved valid, and supports the notion that increased investment to preserve the maintenance status of the building and service components of warehouses is very likely to lead to improved performances of the logistics service level.
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Appendix. Glossary (Tukey, 1977) . Estimate of the regression: this is the goal of a regression analysis, and indicates how a change in the independent variable affects the values taken by the dependent variable. . Linear regression analysis: this brings out relations between variables, especially between variables whose relations are imperfect in the sense that we do not have one dependent variable for each independent variable. . p-value: a measure of the signicance of the relation between the dependent variable and one of the independent variables considered in a model. If the p-value is less than the signicance level (usually 5 per cent) the relation proves statistical signicance, which means that the trend of the dependent variable is affected by the behaviour of the independent variable. . R 2: interpreted as the proportion of the variance in the dependent variable that is predictable from the independent variable. It ranges from 0 to 1: a R 2 value of 0 means that the dependent variable cannot be predicted from the independent variable, while a R 2 value of 1 means that the dependent variable can be predicted without errors from the independent variable. . Standard error: a measure of the variability of a statistic. In particular, it is an estimate of the standard deviation of a sampling distribution. It depends on the number of observations in the population, the number of observations in the sample, and the way that the random sample is chosen. . t-value: a measure of the statistical signicance of an independent variable in explaining the dependent variable. It is determined by dividing the estimate regression coefcient by its standard error. About the authors Alberto De Marco has an MSc in Building Engineering and a PhD in Project Management, and is currently Assistant Professor of Project Management and Industrial Plants at the School of Industrial Engineering and Management of Politecnico di Torino. In 2006 he was appointed Visiting Professor at the Massachusetts Institute of Technology. He works as a member of the Research Group for Engineering Systems and Logistics in the speciality elds of industrial building lifecycle management and construction management. Alberto De Marco is the corresponding author and can be contacted at: alberto.demarco@polito.it Giulio Mangano has an MSc in Industrial Engineering and Management from Politecnico di Torino, Italy. A former Manager in the real estate and facility management department of a logistics company, he is currently a Research Fellow at Politecnico di Torino.

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