Best Practice: Process Improvement



By Dr. Barry Lawrence, Texas A&M University



Senthil Gunasekaran, Texas A&M University









Pradip Krishnadevarajan, Texas A&M University



Warehouses form a critical component of the supply chain; as a result, their design and management determines the strength of the supply chain and makes the flow more transparent. Warehouses can also be referred to as the backbone of a supply chain. In the 1990s, companies focused on inventory management because inventory represented such a large asset on the distributor’s books. With the rise of acquisitions, distributors changed their focus to network optimization, facility consolidation, new location identification, and so on. The emphasis was on getting the right number of warehouses in the right places. The next step was to optimize the internal workings of these facilities (called warehouse optimization). We will see this cycle (inventory, network, and warehouse) repeated again and again as acquisitions rise and fall with business cycles.

The four primary resources to any company are inventory, human resources, accounts receivable, and facilities. Inventory, accounts receivable, and human resources have some flexibility and can be reduced or increased at a quicker pace than facilities or other more fixed assets. Most distributors consider facilities to be the most critical of the four resources, because you need the “space” to support your other assets and sustain your business. Warehouse fulfillment is composed of key inbound processes tied to receiving, staging, and put-away. Cycle counting, product placement, location type, location identification, and storage are all related to these activities. Process improvement can be applied to any of the warehouse processes. Distributors have made little progress in improving most of the warehouse processes, primarily because it’s difficult to determine the return-on-investment (ROI) associated with any type of warehouse process improvement.

The NAW Institute for Distribution Excellence book, Optimizing Distributor Profitability: Best Practices to a Stronger Bottom Line (available at http://www.naw.org/optimizdistprof), details best practices, their implementation, and ROI. These practices are valid in any economy, but the significance of one best practice versus another may change under different market conditions. Each month in this blog, we are introducing a best practice and how it can improve earnings and/or ROI under current economic conditions. We encourage readers to ask questions, debate results, and offer their own experiences with such practices so that we may further the knowledge of the community and the understanding of the science of distribution.

The book breaks business processes into seven groups (SOURCE, STOCK, STORE, SELL, SHIP, SUPPLY CHAIN PLANNING and SUPPORT SERVICES) based on various distributor asset categories. This month, we focus on the STORE group (see exhibit 1). The STORE group has eight processes and we’ll discuss process improvement.



Best Practice: Process Improvement

In general, process improvement techniques seek to increase process efficiency or throughput. Processes tend to remain status quo if there are no discernable problems. In many cases, we get so used to the process we have been using for years that we fail to recognize and often overlook any improvement opportunities. Many companies bring in lean experts to help identify opportunity areas and train people to use lean tools. This approach has been highly successful, since external experts tend to think “outside of the box” and are not bound by a company’s existing practices.

Process improvement techniques are gaining popularity among distributors, but they often are not applied correctly. The practice levels for process improvement are as follows:

COMMON practice: 1) Local efficiency (2) Efficiency focus (regardless of effectiveness) (3) No SOPs (Standard Operating Procedures) (4) Customer driven process improvement efforts

GOOD practice: (1) SOPs (2) 5S approach—Sort, Stabilize or Systematize, Shine, Standardize, and Sustain

BEST practice: (1) Value stream mapping (VSM) (2) Lean and six sigma (lean focuses on speed and six sigma focuses on accuracy) (3) Theory of constraints (TOC) (4) Cause and effect (5) 5 Whys

Exhibit 2 shows a lean implementation framework developed by researchers at Texas A&M University to assist distributors in process improvement (lean and six sigma) activities.



The 10-step approach is as follows:

1. Any lean initiative should begin by identifying a problem/opportunity area where focus is required. The problem area could be in any area, such as warehouse management, inventory management, demand management, logistics, and so on.


2. Metrics must be defined to track the benefits of switching to a redefined process.


3. Once metrics are defined, a detailed current value stream map (VSM) of the process under consideration should be performed along with a sample time study. If multiple people perform the same process, time studies must be done for each individual and an average time can be used in the VSM.


4. Prior to drawing up a VSM for the future state of the process being studied, lean concepts such as cause and effect, the 5 whys, and so on, must be applied to get to the best scenario of a future-state VSM. Brainstorming with process owners is critical to the success of this activity.


5. The metrics defined in step 2 need to be captured again to see what the changes between “as-is VSM” and “to-be VSM” are, in order to justify moving to a redefined process.


6. When lean improvements are performed, many opportunities are identified along the way; therefore, steps 2 to 5 should be performed for all the processes under consideration.


7. Once to-be VSMs are drawn up for all processes, distributors are faced with an important question: How do you prioritize the improvements during the implementation phase? A few factors to consider are ease of implementation, probability of success, ROI, risk, resource requirements, timeline to implement, and so on.


8. It’s also important to create relevant documentation of any improvements. This is for future reference/analysis, developing standard operating procedures (SOP) for new hires, safety documentation and training, and performance reporting.


9. Sharing documentation with other levels and locations of the organization helps standardize the processes and allows the firm to adopt best practices to get to higher efficiencies.


10. Continuous improvement is critical to the survival of any business venture. The lean framework is applied again from step 1 to keep improving operations further. New areas are targeted for the lean exercise. A customer value-add (CVA) activity at the end of the study might seem like a business value-add (BVA)or non-value-add (NVA) activity after a period of time due to changing customer needs, market conditions, and the advent of new technology.

Best Practice in Action: Do Process Improvements Work?

An electrical distributor projected significant increases in sales for year 2006. Sales had been growing in previous years and the distributor’s warehouse was not expected to handle the projected sales growth of 2.5% for 2006. The company’s CFO started talking to facility lease agencies to identify a new facility. The vice president of supply chain told the CFO that they could handle increased sales with the current warehouse by increasing the efficiency of warehouse processes. The CFO did not believe it would be possible. The vice president of supply chain put together a project team to study warehouse processes—product placement, efficient storage equipment, and material handling equipment. The project team developed an implementation plan based on the 10-step framework and demonstrated how it could handle increased sales. The CFO was convinced, and the distributor is still operating out of the same facility. The vice president of supply chain demonstrated the power of warehouse process improvements when deployed appropriately.

The distributor also applied task interleaving for the cycle counting process to increase cycle count/inventory accuracy and increase productivity (number of lines counted per hour). The increase in accuracy will reduce inventory write-off expenses and improve customer service. This will affect the income statement and hence EBITDA. The schematic diagram to quantify cycle counting using task interleaving is shown in exhibit 3.



The distributor also used task interleaving (the process of combining two or more activities) to improve warehouse efficiency. The fast-moving items (A and B) are most frequently accessed. The more times a product is touched, the greater the opportunity for error. The distributor decided to combine cycle counting for A and B items with the put-away process. Each time the A and B products were put-away, the operators performed cycle counting and resolved discrepancies immediately. This procedure increased overall inventory accuracy and customer service. The frequency of counting A and B items was once in two weeks, and they constituted about 10% of all the stock items. Through task interleaving, the distributor experienced annual savings from write-offs and expenses of $100,911 and $47,314 respectively—a 6.6% reduction in total warehouse expenses.

About this Blog

“Managing in an Uncertain Economy” is a blog created by the Council for Research on Distributor Best Practices (CRDBP). The mission of the CRDBP, created by the NAW Institute for Distribution Excellence and the Supply Chain Systems Laboratory at Texas A&M University, is to create competitive advantage for wholesaler-distributors through development of research, tools, and education. CRDBP encourages readers of this blog to send in comments and e-mail this blog to other interested parties.