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Manufacturing in the Warehouse: Postponement Mfg Creates Need to Integrate Logistics & Mfg Systems

Postponed manufacturing moves light manufacturing – kitting, assembly, customization - into the warehouse. This blurs the lines between manufacturing and distribution, creating the need for new information systems that integrate these dual roles. At its simplest, postponement manufacturing means storing "generic" product, e.g., computer components, so that final assembly can be performed quickly and inexpensively to fill a given order.

Postponement manufacturing can reduce back orders and inventory costs. But this creates challenges for the distribution center, beginning with the need for a cultural change away from forecast-centric thinking towards demand-centric thinking. Manufacturing and distribution information has traditionally been handled by distinct systems that exchanged information infrequently, sometimes never. Postponement manufacturing creates the need for integrated manufacturing execution and warehouse management systems that communicate continually and provide supply-chain-wide visibility to employees, customers and partners.

Why the trend toward postponed manufacturing?
As markets become more complex with the shortening product life cycles and increasing variety and complexity, many companies are forced to consider manufacturing and marketing to individual customers, as opposed to mass markets. Michael Dell discovered this idea and built a multi-billion-dollar, highly profitable computer company based on it. Building to order rather than to forecast has enormous advantages: Postponed manufacturing allows for the personalization of generic product that can be differentiated quickly and inexpensively once actual customer demand is known; inventory levels are lower because each work in process inventory item can fill more possible bills of material than could possibly be fulfilled by equivalent finished goods; and building to order substantially reduces the risk of obsolete inventory and associated rework.

Some typical "postponed" activities include -

• Kitting (bundle different products per order)
  
• Packaging (can include security labels)
  
• Light assembly
  
• Reverse logistics and Rebuilds
  
• Compliance labeling (ensure proper label placement, quality)
  
• Gift-wrapping
  
• Custom packaging
  
• Emblems/engraving
  
• Vendor emblems
  
• Configuration, e.g., in assembling home PCs for custom order

Challenges for the distribution center
Yet, postponed manufacturing poses major challenges to the distribution center. First, there is the need to carefully select which manufacturing operations to postpone until customer order. As Dave Caruso of AMR Research said: "You don't want your warehouse workers to need a full toolchest to assemble complicated products." Postponed manufacturing also usually means a larger number of inventory items to stock, and that every SKU Is active all of the time. Yet at the same time, pressures to reduce inventory carrying costs increase the important of inventory and order accuracy. The related trends towards smaller and more frequent orders mean that more and more shipments are required to achieve a constant level of revenues. The real-time nature of today's transactions does not allow for smoothing of fulfillment demand. Where information systems are concerned, the most basic requirement is integration between the manufacturing execution and warehouse management systems. Inventory must be managed much more carefully than in a traditional build-to-forecast environment. The need to build to order while remaining competitive from a delivery leadtime perspective with companies that follow traditional build to forecast models places a premium on inventory volume accuracy. If the parts you need aren't available you will probably lose the order. By the same token location accuracy becomes far more critical – if you compete through rapid delivery, there's no time to waste looking around for things. Optimization at all levels of the supply chain also becomes more critical – for example the ability to pick up all of the components for a single order and drop them at appropriate manufacturing cells based on their workload level.

3PLs take on manufacturing responsibilities
Today, more manufacturers take advantage of postponed manufacturing, and ask their third party logistics providers (3PLs) to take on an increasing share of the responsibility. This in turn places high demands for supply-chain visibility on those 3PLs.3PLs are increasingly asked by their customers to become light manufacturers in order to enable highly flexible responses to changes in the product mix. In some cases, these changes are driven by fourth party logistics providers or "4PLs" who bring together and centrally manage the complete supply chain for a company or specified industry, often managing multiple 3PLs in the process. At the same time, distribution centers are asked to take on wuch value added services as:

• compliance labeling, which can include ensuring proper labeling placement and quality,
  
• kitting or the bundling of different products in an order,
  
• packaging which can include security labels,
  
• and reverse logistics.

The results? The information demands on public warehouses are increasing rapidly. Those requirements demand a live system that provides real-time inventory status across the entire supply chain. Warehouses must track inventory by owner, and owners want direct access to those levels so they can better control their own manufacturing processes. They need to track order configuration status and pinpoint the position of an order on the manufacturing floor. Finally, they need to provide customers with the ability to manage their freight activities directly.

Need for an integrated solution
What is needed today is no less than a completely integrated system that provides visibility across the supply chain by integrating manufacturing; distribution; transportation; order management; procurement; replenishment; labor management; third party billing; vendor managed inventory; as well as B2B and B2C e-commerce.The information solutions available until now have not kept pace with these new requirements. Warehouse management systems and enterprise resource planning (ERP) systems have typically come from two different vendors using two different architectures. The two systems may have had points of interface but were never truly integrated. Warehouse management software has traditionally been developed for and marketed to private warehouses – warehouses at manufacturing plants. Surprisingly few systems are focused on third party fulfillment. By the same token, most warehouse software is designed for the individual distribution center – not many have a true enterprise solution. In turn, most enterprise software providers have never included a true warehouse management solution and have completely ignored the third party fulfillment market. However, that integrated supply chain is vital, and developers have attempted to join proprietary, "best-of-breed" solutions to cover the supply chain. But in recent years, single-source, integrated solutions have emerged, and there are strong advantages to using an integrated system.

Single-source superiority
In a single integrated solution, the manufacturing and distribution systems were built from the ground up to work together, thus offering the highest levels of integration and visibility. True too, the one-vendor approach allows for a single point of contact and the opportunity for quantity discounts. And it represents significant savings during implementation – perhaps 20% - by eliminating the costs of integration.A distributed architecture – for example, a server dedicated to the warehouse management system – allows for peak efficiency in operation. A single server architecture can hamper the efficiency of a high-end application such as WMS or ERP, for example, when running one of those applications alongside end-of-month accounting. On a dedicated server, the WMS operates at peak speed and efficiency. And speed and efficiency translate to profit in a well-run distribution center. Tier three suppliers can interact with the system using an Internet browser, avoiding the need for these companies to undertake an implementation project that may well be beyond their means.

A case history
Learning Resources is a good example of a company that has saved hundreds of thousands of dollars a year in inventory and fulfillment by using postponed manufacturing methods. The producer of children's educational toys previously hired outside jobbers to perform assembly during peak seasons. The company frequently experienced back orders in the past because the right goods weren't in stock and had to incur the costs of contracting the jobbers and shipping the goods to them and back to their site. Since the company has implemented a postponed manufacturing strategy, they have reduced their back order rates to 0.02% while substantially reducing inventory levels. The company's ability to track orders and productivity has also been substantially increased.

All in all, sophisticated information systems that are seamlessly integrated with each other will become more and more important as distribution centers take on light manufacturing responsibilities. In particular, 3PLs that offer information-based value-added services and postponed manufacturing need a top-quality warehouse management system that can make key information visible through EDI or the Internet, track inventory and tasks for multiple owners and deliver financial applications, order management and transportation management. The value gained by postponing manufacturing to just before shipping means that the integration of warehouse management and manufacturing has become a competitive necessity for most distribution centers.

Sidebar: RF the key to integration
Here's an example of how one leading-edge manufacturer has implemented this approach. Customer orders are still entered into the ERP system exactly as in the past. With both the ERP and distribution system using the same database, bi-directional triggers alert each package to changes in the other. Managers keep an eye on orders, group them into waves based on various logical criteria (typically the shipping carrier and customer), and release the waves several times an hour.

Those waves are immediately visible to warehouse operators on radio frequency (RF) terminals. The software automatically converts the orders into picking tasks based on the location of the goods in the warehouse. It calculates an optimized route for the each picker and identifies the exact location of each product. These tasks are delivered through RF terminals that access the task screens in DCMS. Pickers use walkie/riders with electric pallet jacks to store the product. They pick the items, swiping each one to verify it is correct, and load them onto skids.

Once the skid is complete, the software automatically dispatches a forklift truck to deliver it to the manufacturing cells that has been assigned to build the products. When the products are completed, assemblers enter their status and forklift operators soon arrive to take them to the loading locks. Managers receive continual real-time information including graphical screens with progress bars that provide information on how orders are progressing through the warehouse. They can easily drill down for information on specific orders or tasks.