In a much earlier blog, the author wrote about the definition of “work”. Defining work is critical in understanding capacity since capacity is the maximum amount of work that can be done. Define capacity in dollars (unless you have a homogenous offering where sales dollars equal work units) and you will never really know capacity.
However, understanding the maximum amount of work that can be done in a period allows management to know whether they can meet the service proposition in a given amount of time. That total amount of work equals some monetized value when extended by price per unit. It equals some cost when extended by labor cost per period, overheads in that period, etc. So far, this seems basic… almost semantic.
Understanding capacity in units of work is central to understanding the math surrounding mix and density in a distribution operation.
For this discussion, consider a consumer goods distributor. The distribution center (DC) in this example receives goods from sources across the globe. These goods are shipped in retail packaging primarily. These retail packages are generally shipped 6 per carton, 12 cartons per case. The typical pallet holds 24 cases. Some of these consumer goods are painted, some are raw, some are gold plated. These items cost $5, $4 and $10 respectively to purchase. The average sales price to wholesale customers is $10, $8 and $20. For DTC (direct to consumer) customers, a new market for this business, the retail price is $15, $12 and $30.
There are several hundred iterations of this product, though they are the same size and weight. The differences are in appearance and features.
The manager of the distribution center has been with the company for 10 years and has run the DC for 8 of those years. In those 8 years, the company has seen an increase in cost of about 15% but has been able to offset that with price increases of roughly 15%. However, the capacity at the DC has been slipping over that same period. This doesn’t make a lot of sense to management. The ASP (average sales price) has slowly risen, so capacity should be rising as well. In particular, the gold-plated units have been a massive hit with online customers. At double the sales price of painted units, management expected to see massive top line growth. But the DC continues to slip further behind in shipping orders.
Our example company is facing what nearly every distributor will face in the next few years. The continuing change in mix and density is eroding traditional capacity. And many businesses don’t see this until it has adversely affected them.
Mix and density relate to the percentage of volume shipped through traditional distribution versus ‘distro” distribution versus DTC. In a traditional distribution model, a DC brings in goods by the pallet or container. Those goods are broken into smaller orders and shipped to a retailer’s DC. The retailer stores the goods until needed and then breaks them into smaller groupings to send to their retail operations, or in some cases, to smaller distribution centers. In a “distro” distribution model, our example company breaks the goods into smaller groups, by retail store, and ships to the customer DC or directly to the store. In DTC models, our example company ships the most finite grouping directly to the consumer. Most DCs today are a mix of these models. The capacity difference is staggering.
For a traditional distribution model, the movement of goods through our example company is in pallets or cases. There may be cartons flowing, but much of the movement is at the pallet or case level. Each move in the DC handles 1728 units if a pallet, 72 units per case and 6 units per inner carton.
For “distros”, the breakout could be as small as 1 unit per order line, but typically quantities are somewhere in the case size range.
For DTC, the breakout is typically 1 to 3 units per line.
These different distribution models have very different densities. Our traditional model above has a density of about 1000:1. Our distro model has a density of about 100:1. But our DTC fulfillment model is lucky to get a density of about 3:1. By density, we mean the average number of identical units per sales line, per pick, per package, etc. If, on average, a customer orders 2 units of item X, its order density is 2.0. If wholesale customers order by the case, 72 each, then the order density is 72 for that item. However, if both retail and wholesale customers by that item, its density will fall between 2 and 72. And density will continue to drop as DTC orders become a larger percentage of sales.
Typical consumer goods DCs have functions that include warehousing, picking, packing and some form of VAS (value-added service). Each of these functions is impacted by density. VAS is least impacted, as the application of a price tag or special packaging usually impacts each unit. Packing is impacted a bit more, as individual units need more handling than inner cartons or cases. The more individual units (lower density), the more impacted packing becomes. Picking is heaviest hit. Not only does an individual unit take the same amount of time to get to as an inner carton, having two items on an order that are different requires two gets (traveling to the pick face to get an item). This is where the real capacity drain happens.
A normal picking environment required travel to get to the item being picked. This is where about 80% of the picker’s time is spent, getting to the pick face. An order with six items on it can require one get (for an order of six identical units) or up to six gets. The lower the density, the higher the number of gets required to fill the order.
So, capacity can be stated as a simple mathematic equation.
Capacity = maximum number of gets * pick density
Maximum number of gets = total picker hours/hours per get
Pick Density = total quantity of units/number of unique order lines being picked
If you want capacity in dollars, you’d use:
Capacity$ = maximum number of gets * pick density * ASP
There is some variability in hours per get. First, it is usually stated as something like .013 or just under one minute per get. Also, this number can be affected by properly slotting pick faces, by the number of units per get or by other physical properties of the warehouse. But generally, maximum picks is the more stable of these variables since 80% of that time is spent traveling.
ASP can move based on seasonality, mix of wholesale versus retail sales and product mix. While a gold-plated unit is twice the ASP of the painted unit, they take exactly the same amount of work to pick.
For our example company, our management group needs to figure out that the amount of work required to fulfill DTC is very different from wholesale distribution. But that is hard to see as fulfillment tends to come on in a rapidly accelerating curve. This isn’t necessarily a cost problem! DTC orders tend to generate enough margin to make the move worth the effort. But service proposition can be adversely affected in a very short period.
Although an extreme example, changing from traditional wholesale to DTC fulfillment can take picks from 1 to around 1000 for our company. What was going to a warehouse location and getting a pallet of product and putting it on a truck can now take a picker going to over 1000 picks to get the same amount of product. Add to that work the associated replenishment of the pick face and packing all those individual pieces into shipping boxes and affixing the right customer address label.
The good news is that there is little risk of this transformation not happening in the near future (even if your consumer goods business hasn’t already started to see it). More good news is that there are plenty of folks that have been through this and can help you with your transition.
But if you want to work with professionals that have been making this transformation before much of the math was even figured out, give Title 2 Business Services a call. We can make your transformation as painless as possible and we can get it done quickly. Our latest project even shows that coming out of COVID-19 restrictions is a great time to get this transformation behind you!