For one DC, the trap turned out to be its own order approval process. An order for urgently needed replenishments from Taiwan was delayed a full six days because the only person authorized to sign off on the purchase was out of the country. For another DC, the trap turned out to be the company's accounting department. A $3,300 order never reached the DC because of miscommunication with the people in credit. For yet another, the trap lay in a procedural oversight that snarled an incoming shipment from Malaysia. After a series of delays, the shipment finally arrived at the DC only to be held up again while workers frantically searched for a hidden packing slip.
In all three cases, the DCs were ensnared by what we call "velocity traps"—mishaps that disrupt the smooth flow of material, information and cash that's so essential to a well-performing supply chain. Unfortunately, these are hardly isolated cases. Velocity traps are everywhere. Even a well-designed distribution system has velocity traps that can rob a DC of its highest performance potential.
What makes the DC particularly vulnerable to these traps is its position in the larger supply chain network. In its daily transactions, the DC acts as both buyer and seller, simultaneously buying from its upstream suppliers and selling to its downstream customers.
On the surface, the transactions look simple enough: You fill the order, deliver the merchandise and transfer the cash, completing what's known as the order-to-delivery-to-cash (ODC) cycle. (Or if the DC is ordering replenishments, you place the order, accept the delivery and transfer the cash.) Add up the time it takes to complete each step, and you have a measure of DC velocity. It's just that basic.
But the execution, as every DC manager knows, can get complicated. Potential pitfalls lurk in every one of those transactions. The customer's order never reaches the DC. The DC ships the merchandise only to have it rejected at the customer's dock. Payments are misdirected. Orders are put on indefinite credit hold. There are a million ways to lose velocity. It may not be possible to avoid every trap. But the more you know about problems that can interfere with the flow of material, information and cash, the better you can prepare. What follows is a look at some common velocity traps:
Material whirl
The sooner you deliver a shipment, the sooner you get paid. Seems simple enough, but a lot can happen between the time you receive an order and the time your customer takes delivery of the goods. Here are some common traps to watch for:
- Rejected shipments. The DC ships an order out, only to find it's back a few days later. A phone call reveals that the shipment was rejected at the receiving dock because of inaccurate counts or damaged cartons. Get the order right the first time and see that merchandise is packed to withstand the rigors of transportation.
- A "no-show" carrier. The shipment's ready to go, but it ends up sitting on the dock for days before someone arrives to pick it up. Often, it turns out that the customer has chosen a carrier that doesn't normally serve your DC, causing delays while its dispatcher rearranges routes to accommodate the pickup. Your customers aren't obligated to choose a carrier from your DC's preferred carrier list, of course. But make sure they understand that using an unfamiliar company can cause delays of up to two days.
- Out of stocks. An order comes in and the DC goes to fill it, only to find itself short of one of the SKUs. But because the customer has specified that the DC ship only complete orders, the entire shipment is held up. Or a customer that normally orders five cartons suddenly orders 50 with no advance notice, causing delays of a week or more while the DC awaits replenishments. To avoid delays, encourage customers to accept partial orders and to provide advance notice of unusually large orders.
- Congested docks and clogged aisles. DCs that process incoming freight, outbound shipments and returns in the same dock space risk blocking the paths of the forklifts trying to load shipments. Similarly, operations that use a lot of floor space for accumulating coordinated shipments risk running short of space needed for cross-docking operations. Keep aisles and paths clear.
Most of the traps described so far mainly affect outbound shipments, causing delays in a DC's efforts to get shipments out the door. There are others that affect mainly inbound shipments. Here are some common "inbound" traps:
- Unrealistic delivery expectations. The longer the supply chain, the higher the risk of delay—your inbound shipment could miss the departure date for an ocean sailing, be bumped to the next flight, or get held up in customs. And contrary to popular belief, an airfreight shipment from Southeast Asia to the East Coast doesn't arrive overnight; it typically takes eight calendar days door to door. Let everyone in your organization know what's realistic to expect.
- Unfamiliar foreign trade practices. Missteps by first-time importers can lead to lengthy delays. Consider the case of a DC that ordered product manufactured in Malaysia under Incoterms, Delivered Duty Paid. Under DDP, the seller hired the forwarder/carrier to deliver the goods, so the buyer didn't bother to check to see which forwarder the seller had chosen. As it turned out, the seller selected a forwarder that did not hold the DC's power of attorney to clear the goods through U.S. Customs, which meant the goods had to be handed over to a different broker for customs clearance and delivery. Because the delivery wasn't scheduled with the broker, the goods were stowed in a corner until someone realized the shipment was overdue. Keep a close watch on international shipments and get outside assistance, if necessary.
Data woes
While everybody accepts that moving material from point A to point B takes time, most assume that information flow is instantaneous. But that's not always true. For all our lightning fast digital transmission capabilities, plenty of people still communicate via phone, fax and even mail and then spend hours or days waiting for callbacks. Here are some other traps to watch for:
- Hierarchical approval processes. The typical corporation builds multiple layers of approval into its purchasing process, sometimes even requiring signoff at the highest levels. While that may reduce its exposure to fraud, it also can lead to serious delays. Take the case of an Indianapolis DC that was caught by surprise when demand took off for an item manufactured in Taiwan. With orders pouring in and supplies dwindling, the DC's purchasing agent tried to place an urgent order with the supplier, only to discover that the dollar value exceeded her authorization limit. Her boss, the purchasing manager, was away on business in Frankfurt but had left a number for emergencies. At 2: 30 p.m. Thursday, she called to ask him to send an authorizing fax directly to the factory in Taipei, catching him as he was finishing dinner at 9: 30 p.m. The boss finally got to a fax machine at noon Friday—which was 6: 00 p.m. Friday in Taipei, where the factory was closing for a long holiday. To avoid this trap, designate a backup person to authorize purchases in emergencies.
- Bad inventory data. You've invested in bar codes to eliminate data entry errors and in RFID tags to ensure inventory locations don't go undetected. But you still run into situations in which the computer says that Item A is in the DC, but it simply can't be found. Don't assume your inventory data is 100-percent accurate. It's unlikely to be perfect unless you've put cycle counting or similar processes in place to ensure it.
- Missing information and document discrepancies. There's no room for error when it comes to global trade documents, where the smallest omission or discrepancy can lead to lengthy delays and failure to be paid. The information on the advance shipping notice or container contents list (both of which must be submitted well before the sailing or wheels-up) must reflect exactly what arrives at the destination port or airport. Data on other documents—purchase orders, bills of lading, letters of credit, and so forth—must match up as well. Companies that participate in the Customs-Trade Partnership Against Terrorism (C-TPAT) have the added responsibility of complying with that program's information requirements or risk being bounced from Customs'"EZ-Pass"lanes. Prepare your documents carefully.
Follow the money
However irksome they may be, problems that halt the flow of materials or data generally surface quickly. The customs broker calls with the bad news. The warehousing software notifies the supervisor that an item is out of stock. Whatever the problem, the DC manager can start taking steps to resolve it.
That's not necessarily true of the velocity traps that can disrupt the flow of cash. Days, weeks or months may go by before the shipper or receiver hears about the problem, which only lengthens the delay. Here are some common cash flow-related traps:
- Failure to communicate. Lack of communication between the credit department and the DC can result in serious delays. Take the case of a retail store that hit a stone wall in its attempts to order replenishments from its DC. The retail store placed a new order for $3,300 from the DC at a time when it was already using $28,775 of its $30,000 credit line. But the order never reached the DC's order management system. Instead, the company's credit department put it on indefinite credit hold until the retailer reduced its balance. In a desperate bid to free up some credit, the retail store returned some slow-moving product, paying a hefty restocking charge in the process (a move that benefited neither party). A quick phone call could have resolved the matter and prevented the delays.
- Lax returns management. For some types of merchandise, return rates run as high as 35 percent, which could mean a lot of stuff for the DC to manage, sort, store and move. Not only do those returns tie up cash, but they also impose a burden on the DC to keep its returns records up to date so it can properly credit customers' accounts.
- Failure to update records. There's no substitute for a regular audit of records. Take the case of a hardware DC whose supplier suddenly halted deliveries. The supplier, a highly profitable regional hardware company, had recently bought out a competitor, becoming a national hardware company overnight. In the ensuing reorganization, the supplier consolidated the accounts receivable functions and moved them to a new location. The DC somehow missed the notice advising it of the supplier's new bill-to address, and its managers were shocked to learn that the supplier had stopped delivering hardware because the DC owed more than 120 days' worth of outstanding payments. This trap could have been easily avoided by conducting a regular audit of all bill-to addresses.
It doesn't take a hurricane, fire or earthquake to snarl a supply chain. The smallest miscue or oversight can disrupt the flow of material, information and cash, causing velocity to plummet. Review your operation to determine where it might be vulnerable. Then eliminate the traps and watch your DC's velocity soar.
