The design of a cross docking system for Makro Malaysia’s fresh and frozen products and the economical analyses of this cross

The design of a cross docking system for Makro Malaysia’s fresh and frozen products and the economical analyses of this cross

docking system for Makro Malaysia.

Author: S.M. Lutke Holzik

Study: Industrial engineering and management science University: University of Groningen

Faculty of Management and Organization Groningen, The Netherlands

Primary supervisor: Drs. D. Vegter Secondary supervisor: Dr. J.T. van der Vaart

Graduation organisation: Makro Cash and Carry Malaysia Kuala Lumpur, Malaysia

Company supervisor: P. Boone

Copyright © 2005 Stephan M. Lutke Holzik. All rights reserved. No part of this publication may be

reproduced, stored in retrieval system, or transmitted, in any form or by any means, electronic, mechanical,

photocopying, recording or otherwise, without the prior permission of the author.

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Management summary

Makro Malaysia operates a cross docking system for its dry foods. So far cross docking dry resulted in high implementation effort and poor results. Makro’s region office encouraged Makro Malaysia to introduce a cross docking system for its fresh and frozen products, since they expect many benefits from this cross docking system. The goal of this research is defined as:

’’Design a cross docking system for Makro Malaysia’s fresh and frozen products’’ and

’’Identify advantages and disadvantages and perform an economical analysis of this cross docking system for Makro Malaysia’’

This research showed that 2700 products of all fresh and frozen products qualify for cross docking. Qualified products were classified in fruit & vegetables, chilled and frozen products with temperature requirements of respectively (5

C-10

C), (0

C-4

C) and (- 18

C/-24

C). All suppliers of these qualified products were included, since no supplier statistics were available to select suitable suppliers.

A pre-allocated DC consolidation cross docking system was recommended, based on product characteristic and volume flows. Store orders will be consolidated in this system.

Products that arrive at the distribution centre will be assigned to stores and will be send to stores at the same day.

The cross docking facility will be located in Klang Valley with three different temperature segments, in which operations will be performed manually. A facility of 2000 m

is required, based on the expected throughput in three years, including storage space for expected importing activities. Stores will be delivered daily with f&v products between 4 and 6 a.m. and chilled products will be send in same trucks as f&V, only twice a week. Frozen products will be delivered twice a week in separate trucks during daytime.

Current information systems suffice the requirements of cross docking. Labour equipments were defined and consist of: QC, processing, administration and management employees. Products will be handled by box or pallet with corresponding handling equipment as lift trucks and handpallets.

The economical analyses showed elements in Makro’s supply chain that will be affected

by introducing cross docking. These elements consist of: suppliers, facility, transport,

stores and head office. The expected cost influence of cross docking on these elements,

were analysed by a cost model for each affected element. The supplier cost model

showed that suppliers of f&v, chilled and frozen product will save respectively 0.13, 0.17

and 0.15 Malaysian Ringgit for each kilogram delivered product, mainly because of

lower transport costs. Facility and transport costs depend on throughput and are therefore

calculated in a scenario analyses. The operational costs of stores will be discussed and

seems to be unaffected by introducing cross docking. The head office will save invoice

costs as well as import expenses.

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Three scenarios were performed to simulate a start up period, an operation period halfway the planning horizon and a full utilisation period. The results of the scenario analyses represent the facility and transport costs minus the supplier, import and invoice savings. Scenario ’’start up’’ showed monthly costs for Makro of RM 190.000, -.

Scenario two showed monthly costs of RM 30.000, -. The last scenario, in which the facilities capacity is utilised optimal, results in RM 20.000, - benefit. The scenario analyses showed that fixed facility costs and transport costs are the main cost elements.

Analysing customer shopping behaviour showed that, price, promotions, quality of products, assortment and availability of products, are important shopping criteria for Makro’s customers. The influence of cross docking on these criteria is therefore important.

Cross docking can result in:

• Increased product quality since products will be delivered more frequently to the stores. This is especially important for horeca customers.

• Increased assortment possibilities, since a standardised assortment throughout Malaysia will be possible, and value added activities in the DC can be performed

• Increased availability of products, since stores will be replenished daily. The system’s sensitivity however is an important disadvantage regarding to product availability

• More promotions, since the distribution centre offers possibilities to increase promotional activities.

• Less congestion of unloading trucks at stores, since lesser trucks will replenish the stores

• Supplier measurements

The main disadvantages of cross docking are:

• High implementation requirements of Makro. Besides, logistic providers in Malaysia are not experienced in cross docking, which results in even higher efforts.

• System sensitivity

• High operational costs in case of low utilisation of the capacity

This research showed that cross docking generates advantages, such as, more promotions,

increased quality and assortment. There was shown as well that operational costs are

high, especially if utilisation of the capacity is low. Cross docking however generates lots

of prospects that might result in cost benefits. Activities, such as, decreasing inventory,

buying from the source, negotiating lower cost price because of purchase power,

importing products, eliminating returnable products, picking up products from suppliers

and eliminating QC at stores, are feasible because of cross docking. This might result in

more financial benefits than costs of operating a cross docking system. This however will

only be the case, when Makro will take advantage of the prospects that originate from

cross docking. Implementing cross docking and not taking advantage of the prospects

will result in high costs for Makro Malaysia.

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Preface

The first day of my internship at Makro Malaysia started at 5 a.m. Then, I realised I stepped into Malaysia. Hawker stalls started their business, the sun was shining, little children in school uniform with badminton rackets walked by and traffic was (of course) congested. Kuala Lumpur, I love that city! The memories of all nice people, twenty-four seven economy, all shopping malls, pool parties, Chinatown and the Malaysian food make me smile behind this computer. The report you’re reading now is the result of my internship at Makro Malaysia. The melancholic words above reveal the way I enjoyed my stay in Malaysia. This stay wouldn’t be that great without the following persons, who I really want to thank.

’’Just do the work, but more important enjoy your stay here’’ was the message of Pieter Boone when I entered Makro’s head office in Shah Alahm. I am really thankful for his way of supervision and the opportunity he offered me to do my internship at Makro Malaysia. Thanks to him, I had the opportunity to experience working abroad, explore Malaysia and Bangkok, and experience working in the logistic area.

Next to Pieter, I really want to thank Alex, Boni and Prakash for the delicious lunch places they brought me to.

Lunch was the highlight of the day.

They taught me the Malaysian way of living and recommended interesting places to visit. Best of all was just the fun we had and the marvellous food they ordered for me.

Furthermore, I want to thank David and Kittinan for explaining me all their logistic experience. Thanks to them, I had a pleasant stay in Bangkok and I learned a lot of cross docking in Asia.

Finally, I would like to thank Dennis Vegter and Taco van der Vaart for their valuable

advice and challenging comments. In particular I would like to thank Denis Vegter for his co-operation to overcome the distance between Kuala Lumpur and Groningen.

Stephan Lutke Holzik Groningen, 30 mei 2005

Thanks to Alex, Boni and Prakash for

all marvellous lunches

5

Table of contents

MANAGEMENT SUMMARY ... 1

PREFACE... 4

TABLE OF CONTENTS... 5

1 MAKRO CASH & CARRY MALAYSIA ... 7

1.1 I NTRODUCTION ... 7

1.2 SHV & M AKRO ... 7

1.3 M AKRO M ALAYSIA ... 8

1.4 F UTURE EXPECTATIONS ... 10

2 GENERAL PROBLEM DEFINITION ... 12

2.1 I NTRODUCTION ... 12

2.2 P ROBLEM IDENTIFICATION ... 12

2.3 P ROBLEM CONTEXT ... 14

2.4 P ROBLEM DEFINITION ... 14

2.4.1 Objective ... 14

2.4.2 Main question... 15

2.4.3 Sub questions... 15

2.5 R ESEARCH APPROACH ... 15

2.5.1 Approach for Designing a cross docking system ... 17

2.6 C ONDITIONS AND ASSUMPTIONS ... 20

2.7 D ATA COLLECTION ... 21

2.8 D ATA QUALITY ... 21

3 THEORY... 23

3.1 I NTRODUCTION ... 23

3.2 W HAT IS C ROSS D OCKING ? ... 23

3.3 I DEAL CONDITIONS FOR SUCCESS ... 25

3.4 T YPES OF CROSS DOCKING ... 28

3.4.1 Pre-allocated supplier consolidation ... 29

3.4.2 Pre-allocated DC consolidation... 29

3.4.3 Post-allocated DC consolidation ... 30

3.5 A DVANTAGES AND DISADVANTAGES OF C ROSS D OCKING ... 32

4 CUSTOMER NEEDS... 34

4.1 I NTRODUCTION ; ... 34

4.2 C URRENT C USTOMERS ... 34

4.3 C URRENT LOGISTIC PROCESS ... 36

4.4 S HOPPING CRITERIA ... 38

4.5 C RITICISM OF CUSTOMERS ON SHOPPING CRITERIA ... 40

4.6 C ONCLUSION ... 41

6

5 GENERATE SYSTEM DESIGN ... 43

5.1 I NTRODUCTION ... 43

5.2 A SSEMBLE THE DESIGN PARAMETERS ; ... 44

5.2.1 List of cross docked products and their suppliers ... 44

5.2.2 Product Characteristics ... 53

5.2.3 Project throughput rate per planning horizon ... 55

5.2.4 Recommended store delivery schedules, and recommended supplier schedules... 57

5.3 C ROSS DOCKING OPERATIONS REQUIREMENTS ... 59

5.4 L AY OUT THE CROSS DOCKING DESIGN ... 62

5.5 D EVELOP LABOUR AND EQUIPMENT REQUIREMENTS ... 63

5.6 L IST INFORMATION SYSTEMS REQUIREMENTS ... 65

5.7 C ONCLUSION ... 66

6 ECONOMICAL ANALYSES ... 68

6.1 I NTRODUCTION ... 68

6.2 A FFECTED COST ELEMENTS ... 68

6.3 C OLLECTED INFORMATION ... 69

6.4 S UPPLIER COSTS ... 70

6.5 F ACILITY C OSTS ... 72

6.6 T RANSPORTATION COSTS ... 76

6.7 S TORE COSTS ... 77

6.8 H EAD OFFICE COSTS ... 78

6.9 S CENARIO ’ S ... 79

6.10 R ELIABILITY OF ECONOMICAL ANALYSES ... 82

6.11 C ONCLUSION ... 83

7 ADVANTAGES AND DISADVANTAGES ... 85

7.1 I NTRODUCTION ... 85

7.2 P RICE ... 85

7.3 P ROMOTION ... 86

7.4 Q UALITY ... 87

7.5 A VAILABILITY ... 87

7.6 A SSORTMENT /P ACKAGING ... 87

7.7 O THER ... 88

8 CONCLUSION ... 90

8.1 I NTRODUCTION ... 90

8.2 R ECOMMENDED CROSS DOCKING DESIGN ... 90

8.3 A DVANTAGES AND DISADVANTAGES ... 91

9 REFERENCES ... 93

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1 Makro Cash & Carry Malaysia

1.1 Introduction

This research will describe the introduction of a cross docking system for Makro Malaysia, a wholesaler selling food and non-food consumer articles to professional customers. An introduction of Makro Malaysia will therefore be given in this chapter.

Makro’s origin will be described in paragraph 1.2 where after its mission and markets will be described in paragraph 1.3. The last paragraph of chapter one will describe the future expectations of Makro Malaysia, since its expansion will highly affect the cross docking system.

1.2 SHV & Makro

Makro cash & carry is part of SHV Holdings N.V. A brief description of SHV and the origin of Makro will be discussed in this paragraph.

SHV Holdings N.V. is a Dutch company, which originated in 1896 from a merge between a number of large coal trading companies. SHV’s current activities are widespread, in spite of its coal trading history. Current activities involve:

- Trade in and distribution of LPG (SHV Gas)

- Trade in food and non-food consumer articles (Makro) - Provision of private equity (NPM Capital)

- Trade in and production of raw materials (Recycling) - Exploration and production of oil and gas (Dyas)

SHV is a privately held company, which gained sales of more then € 10 billion in 2003, employs more than 28000 persons, has operating industries around the world and is head quartered in Utrecht the Netherlands.

SHV’s strategy is directed at growth through performance, going for niche and market share, investing in people, managing change, looking for the unusual by learning and reacting and keep the things simple.

SHV’s trade in food and non-food consumer articles, going by the name of Makro cash &

carry, started in 1968 in Amsterdam and its fundamental business model is that of a wholesale cash and carrier. Makro used to operate in the European, South American and Asian market, but knocked of the European market a couple of years ago. Makro, in the year 2003, has 81 stores in South America and 60 stores in Asia, with a total sales up to € 2.8 billion.

A region office is situated in every continent in which Makro is operating. Its main goal is to support activities of the different Makro countries. The region office of Makro Asia is located in Bangkok, Thailand. This region office supports the following countries:

Thailand, Indonesia, China, The Philippines and Malaysia. Figure 1-1 provides a

8

geographical overview of Makro countries in Asia and mentions the number of stores that are operating in every country.

1.3 Makro Malaysia

Makro Malaysia, which originated in 1993 by a joint Venture between SHV and a local partner, will be described in this paragraph. Its mission and the markets in which it operates will be described here as well as its competitors.

Makro Malaysia has eight stores on peninsular Malaysia and its head office is situated in Shah Alam. Makro Malaysia’s sales reached up to € 180 million in 2003, the firm employs more then 1000 employees throughout Malaysia and formulated its mission as:

"Makro is a cash and carry wholesaler selling quality food and non food products providing the best buying conditions and solutions for our professional customers."

The company’s core product range is in food, fresh and dry, and complementary products that Makro’s customers use in their businesses on a day-to-day basis. Figure 1-2 provides an overview of sales and sales categories in 2003 of Makro Malaysia.

Figure 1-I Geographical overview of Makro countries

in Asia and number of stores

9

Makro’s core customers are small and medium enterprises like small retailers, hotels, restaurants and caterers, professionals, and institutions such as hospitals, schools etc. The company does not focus on the individual and family-end-users, although it continues to offer products, both food and non-food to this customer base. Makro’s customers will be described in chapter four.

Makro’s competitors are the wet markets and the traditional wholesalers. The company differentiates itself from these competitors by price, assortment and customer relationship management. The commercial strategies used to achieve this differentiation are:

• A balanced wide and not deep assortment.

• As less of number of suppliers.

• Space allocation based on efficiency/cost price.

• Prices always competitive with its markets.

• Operating as first or second source for customers.

• Buying prices based on volume.

Dry Food sales per category 2003 6%

18%

29%

38%

9% 0%

Snack & Confec.

Dry-basic Dry Grocery Drinks & Tobacco Detergents & Disposables Others

Fresh Food sales per category 2003 8%

22%

5%

23%

20%

22%

Bakery Fruit & Veg.

Fish Meat Chilled Frozen

Non Food sales per category 2003

20%

13%

30%

6%

16%

7%

4% 4%

Household Stationery/ Office Electro Clothing DIY Textile Sports Furnitures Sales per head group 2003 in RM

102166762

429071643 210424997

Fresh food

Dry food

Non food

Figure 1-II Overview of Sales and Sales categories of Makro Malaysia in 2003

10

1.4 Future expectations

Makro Malaysia expanded from one store in 1993 to eight stores in 2004 and is willing to expand more in the next view years. This expansion will influence Makro Malaysia’s activities and will therefore be discussed in this paragraph.

Currently Makro has eight stores in Malaysia and all are situated on the peninsular Malaysia. Makro’s management certified the next view years as the years of expansion and remodelling, which means that the number of stores will increase and the lay out of the stores will change with the intended goal to increase sales. The expected store expansion will be discussed first where after the remodelling will be described.

Makro plans to open two new stores in November and December of ’05, ’06 and 2007.

The geographical location of the stores and the expected new stores are shown in figure 1-3

Figure 1-III Location of current and expected

Makro stores in Malaysia

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As a consequence of the store expansion it is expected that Makro Malaysia’s sales will increase.

A look inside Makro’s stores confirms the wholesaler approach. The stores are built like big warehouses with a large amount of stock available in the store and products are mainly presented in shelves and on pallets. Makro Malaysia decided in 2003 to focus on a specific group of customers, namely the Horeca customers. A consequence of this focus is a remodelling project set up in September 2004. This remodelling project involves a renovation of the interior of fresh food products in the stores with the intention to increase the fresh food product assortment, quality and at last increase the sales of the fresh food.

There is a big difference between stores in assortment and the way products are displayed. Some stores display fresh products in ice others display them in refrigerators and there are stores that do not sell fresh products. The remodelling process will standardise the display and availability of fresh products: fresh food products will be displayed in the same way as in a wet market and all stores will sell fresh products. The first stores of Makro Malaysia are renovated, with increased sales as consequence.

According to Makro’s planning all stores will be renovated in September 2005.

The sales growth of fresh food products is expected; because of the store expansion and remodelling. This paragraph can therefore conclude that the two described activities will increase the sales of Makro Malaysia

This chapter described Makro, its origin, competitors, markets and future expectations.

The company and its environment will affect the cross docking system that will be

designed in this research. The general problem definition will be described in the next

chapter.

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2 General problem definition

2.1 Introduction

This chapter will clarify the reason and approach of this research at Makro Malaysia, based on research methods of de Leeuw

. Paragraph 2.2 will describe the reason for this research, where after the environment in which this research will be conducted will be described in paragraph 2.3. The problem definition, which will be described in paragraph 2.4, consists of the objective, the main question and sub questions of this research. The steps that are performed to answer the main question will be explained in paragraph 2.5, where after paragraph 2.6 will describe the assumptions and conditions of this research.

The last paragraph of this chapter will describe the data collection of this research.

2.2 Problem identification

The region office of Makro is informed of the expected sales increase of Makro Malaysia’s fresh and frozen products. They expect cost advantages by introducing a new logistic system for these products, named cross docking, based on their experience.

Makro Malaysia operates a cross docking system for dry products, but a cross docking system for fresh and frozen products will be of great advantage for Makro Malaysia according to the region office. The expected advantages for Makro Malaysia will be described after outlining the proposed cross docking system. Since describing the proposed cross docking system will be necessary to understand the expected advantages.

Napolitano

identified essential elements for cross docking, these elements are:

suppliers, products, product flow, information flow, people and costs. All elements will be discussed in chapter three extensively, but will be used here to explain the cross docking system, proposed by Makro’s region office.

Supplier

Makro’s head office should consolidate orders of all different stores, by using a computerised supply chain management system. The consolidated order should be send by e-mail to the supplier, where after the supplier delivers the articles for all stores to the distribution centre.

Product

Products in the distribution centre should be assigned to different store lanes where the products are physically stored until their departure. Trucks should be loaded from these store lanes and depart from the distribution centre when all incoming products are assigned or when there is a full truckload for a store. The time between arrival and departure of the products is kept as short as possible, normally within one day.

Information

A full truckload with different products should be delivered to the stores. An Electronic

Data Interchange (EDI) should be used. EDI is electronic communication of operational

data such as orders and invoices between organisations. This EDI system provides the

necessary information for the stores, suppliers, head office and distribution centre.

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Product flow

Little stock space should be available in the distribution centre for imported products that will arrive in big quantities. These big quantities cannot be shipped to the stores on the same day because of storage capacity shortage in stores. No stock should be kept for other products, since the products should be dispatched shortly after receiving.

People

A long-term contract should be set up between Makro and a logistic provider. This third party should be responsible for the ownership and operations in the distribution centre as for the trucks that depart from the distribution centre to the stores.

Costs

Makro’s region office advises this system, since they expect Makro Malaysia to benefit from this cross docking system. This expectation is mainly based on experience in other countries. Some expected advantages according to the region office are:

• Products from suppliers will arrive at the distribution centre as a full truck load (FTL) shipment. At the distribution centre, the FTL shipments from various suppliers will be broken up and consolidated again to create FTL shipments that will go to the various stores. These FTL’s will result in lower transport costs, by which price competitiveness of Makro in the market can be improved.

• Cross docking creates a distribution network by which Makro will be able to store and ship products. Makro will therefore be able to import products in bulk, store them in the distribution centre and ship them gradually to the stores. The import of products will decrease the cost price of some products, since these products can be bought abroad low-priced. This will improve the price competitiveness in the market.

• The supplier receives one order, since orders of stores will be consolidated with cross docking. This results in processing fewer invoices. A decrease in operating costs due to fewer invoices can improve the price competitiveness of Makro in the market

• Quality and freshness of products in stores will be increased since the products will be delivered to the stores more frequently.

Makro Malaysia is informed of these benefits by the region office and is experiencing some of these advantages in its cross docking system for dry foods. Makro Malaysia is now willing to introduce cross docking for fresh and frozen products. But as literature provides: ’’Cross docking has many parameters that are often unique to a company or situation’’

and ’’Many cross-dock practitioners say what is most overwhelming are the thousands of little details involved when making the move to cross docking’’

and

’’Cross docking cuts across many interacting functions within and beyond the

warehouse…determining the most appropriate operation can be quagmire of details and

data’’

, copying and applying the proposed system is therefore impossible. It is therefore

difficult to determine the benefits of cross docking for Makro Malaysia’s fresh and frozen

products.

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The above-mentioned problems are the motive for this research and can be divided in two major research reasons:

1) Makro Malaysia wants to know how a cross docking system for the fresh and frozen products works in their supply chain and

2) Makro Malaysia wants to know if the advantages, as mentioned by the region office, are feasible in Malaysia when costs are taken into consideration.

2.3 Problem context

The environment in which this research is conducted will be described in this section.

Activities, which influence this cross docking system, will be described here.

Opening new stores and remodelling project

Chapter one mentioned that the sales of fresh and frozen products should increase because of store expansion and the remodelling process. Increasing sales will affect the cross docking system, since the volume of cross docked products determines the warehouse size, type of carrier, number of employees etc.

Cross docking dry food

Makro Malaysia just launched a cross docking system for the product categories non- food and dry food, hereafter called cross docking dry. The awareness of complexity in cross docking as described in paragraph 2.2 and the poor results of cross docking dry are important reasons for this research.

Thailand

Makro Thailand already introduced a cross docking system for fruit & vegetables and seafood. The results were satisfying and are an important reason for Makro Malaysia to investigate the possibilities for cross docking fresh and frozen products in Malaysia.

2.4 Problem definition

This paragraph will describe the objective, the main question and the sub questions of this research. The sub questions correspond with the research approach, which will be discussed after this paragraph.

2.4.1 Objective

As mentioned before, the reason for this investigation is twofold and the objective is therefore formulated as:

-’’Design a cross docking system for Makro Malaysia’s fresh and frozen products’’ and

-’’Identify advantages and disadvantages and perform an economical analysis of

this cross docking system for Makro Malaysia’’

15 2.4.2 Main question

What cross docking design for the fresh and frozen food is recommended in Makro Malaysia’s environment, and what advantages and disadvantages can be identified by applying this cross docking system, taken into account the customer needs and costs of this operation?

2.4.3 Sub questions

This research will use the method of de Leeuw

for answering the main question. The main question will be divided in sub questions, according to this method. Answering the sub questions, answers gained by investigation, will be used to answer the main question.

The reason for formulating these sub-questions will be described in the research approach, which will be described after mentioning the sub questions of this research:

1) What is cross docking and what are its general advantages and disadvantages?

2) What are the customer needs?

3) Which products and suppliers qualify for cross docking?

4) What are the operational requirements?

5) What are the facility’s lay out requirements?

6) What are the labour and equipment requirements?

7) What are the information requirements?

8) What is the economic analysis?

9) What are the advantages and disadvantages of the designed cross docking system for Makro Malaysia’s fresh and frozen products?

2.5 Research approach

The steps that are performed to answer the main question will be explained in this

paragraph. The mentioned sub questions are formulated by analysing the research

approach, which is summarized in figure 2-1.

16 The sub-questions will successively be discussed:

1. What is cross docking and what are the general drawbacks and benefits of a cross docking system? (Chapter 3)

Chapter 3 will describe a theoretical review, in which a detailed description of cross docking will be provided. This chapter will describe the advantages and disadvantages of cross docking as discussed in theory as well.

2. What are the customer needs? (Chapter 4)

Makro’s mission is stated as follow; "Makro is a cash and carry wholesaler selling quality food and non food products providing the best buying conditions and solutions for our professional customers." It is Advantages and Disadvantages of

Applying Cross Docking Customer Needs

Theory

Cross Docking Design

Economic analysis

Chapter 3 Chapter 4

Chapter 6 Chapter 5

Chapter 7

Assemble design parameters

Develop alternative operational requirements

Lay out the Cross Docking Design

Develop Labour and equipment requirements

List information systems requirements

17

important to know if cross docking leads to better buying conditions, since this is the goal of the organisation. This chapter will describe important buying conditions for Makro’s customers and the perception of its customers towards these buying conditions in the current situation.

This sub question will be answered by describing outcomes of a customer behaviour research that is performed in 2004. More than 600 Makro customers were interviewed throughout Malaysia. Results of this research will be used to determine important shopping criteria and perception of Makro customers.

2.5.1 Approach for Designing a cross docking system

Napolitano’s

approach will be followed in this research to design the recommended cross docking system. This approach consists of five phases. These five phases will briefly be discussed here and will gain insight in the reason for sub questions 3, 4, 5 and 6.

Figure 2-2 shows the phases that are appropriate to design a cross docking system according to this method.

Assemble design parameters

Develop alternative operational requirements

Lay out the cross docking design

Develop labour and equipment requirements

List information systems requirements

Step A

Step B

Step C

Step D

Step E

Figure 2-II Method to design a cross docking system

18

Step A: In this step design parameters will be identified. The design parameters consist of a list of cross docked products and their suppliers, projected throughput rate per planning horizon, product characteristics and delivery schedules of suppliers and stores.

Step B: Product characteristics differ and may require unique operational flow requirements. The operations to carry out the cross docking has to be developed per product group.

Step C: The lay out of the facility should be analysed next, to visualize and analyse flows, place permanent equipment and to estimate the required space.

Step D: Labour and equipment requirements can be determined from the throughput rate.

Step E: The necessary information system is the final step in designing the cross docking system.

This approach for designing a cross-docking system results in the following sub- questions:

3. Which products and suppliers qualify for cross docking?

All sales data of 2003 and 2004 will be grouped and converted in weight data to determine volume flows for each product group. These volume flows and characteristics of each product group will be identified.

Furthermore criteria will be defined and standardised to determine which products and suppliers qualify for cross docking.

4. What are the operational requirements?

Chapter three will describe three different cross docking designs with corresponding operations. For each product group (f&v, chilled and frozen), one of these three cross docking designs will be recommended.

This recommendation will be based on the defined product flow and product characteristics of sub question 3. The recommended cross docking design of each product group will consequently provide the required operations, since these will be discussed in chapter three.

5. What are the facility’s lay out requirements?

This research assumes that a logistic provider will be responsible for the

facility. The lay out of this facility is therefore depending on the available

building and logistic provider. Lay out requirements will consequently not

be defined. The required size of the facility will be determined, since this

influences the costs of the cross docking operation.

19

6. What are the labour and equipment requirements?

Consequences of cross docking for current staff at Makro’s head office and in stores will be described first. Furthermore, labour and equipment requirements for the cross docking facility will be described. The activities that will be performed in the facility will be defined, based on the operational requirements. The required labour and equipment will be determined by analysing these activities, benchmarking the labour and equipment requirements of cross docking dry, benchmarking the cross docking operation in Bangkok and discussing the labour and equipment requirements with several logistic providers.

7. What are the information system requirements?

An information flow diagram will be designed in which all information flows and actors that require information will be defined. This research assumes that operations will be performed manually. The required information system requirements will be defined by analysing the information flow diagram and taken into account the manual approach.

The answers on these questions should provide the information to design a recommended cross docking system for the fresh and frozen goods of Makro Malaysia. This will be discussed in chapter 5.

The costs of the designed cross docking system as well as the expected cost saving of the cross docking system will be calculated in chapter 6. This answers sub question

8. What is the economic analysis?

Makro’s supply chain will be described to identify all cost centres that will be influenced by introducing cross docking. Each affected cost centre will be discussed individually to identify the impact of cross docking on this cost centre. Cost models will be composed in which incremental costs of the current situation and the cross docking situation will be calculated. The difference in incremental costs of the current and cross docking situation for all affected cost elements will be calculated for different scenarios, since many costs depend on throughput. This will gain insight in the impact of cross docking on Makro Malaysia.

Chapter seven will explain the advantages and disadvantages of the designed cross docking system. This will answer sub question

9. What are the advantages and disadvantages of the designed cross docking

system for Makro Malaysia’s fresh and frozen products?

20

The advantages and disadvantages of cross docking will be described for each shopping criteria, mentioned in chapter four. Advantages and disadvantages of cross docking will be determined by analysing the mentioned theory, analysing the results of Malaysia’s cross docking dry and Bangkok’s cross docking fresh and by analysing the recommended cross docking design.

Chapter eight will provide the conclusion and will give answer to the main question.

’’What cross docking design is recommended in Makro Malaysia’s environment, and what advantages and disadvantages can be identified by applying this cross docking system, taken into account the customer needs and the cost of this operation?’’

The research approach and the reason for formulating the sub questions are described now. The next paragraph will describe the conditions and assumptions of this research.

2.6 Conditions and assumptions

Introducing cross docking involves a third party, according to Makro Malaysia’s managing director Pieter Boone

. It’s not Makro’s core business to operate in logistics.

That is why Makro wants to collaborate with an experienced party that is able to carry out the operational activities. This means that a third party will possess the distribution centre as well as the transport vehicles. It will therefore be responsible for the distribution centre lay out and the warehouse management system as for the distribution centre equipment, employees and organisation.

The impact of the store remodelling is taken into account in the sales figures for the next view years.

It is assumed that the location of the fresh and frozen cross docking distribution centre is in Klang Valley. This area is located about 30 km west of Kuala Lumpur. Makro’s cross docking dry distribution centre is located there as well.

Makro’s management

decided that the fresh and frozen cross docking system will be operated manually, since the equipment of cross docking dry was very expensive and caused ICT problems. Cost calculations are performed to test this assumption and are provided in the appendix of this paragraph. These calculations justify this assumption and a manual approach is therefore assumed in this research.

Makro Malaysia uses a supply chain management system to support the cross docking dry system. This management system, called SuChaMa, will be used for the fresh and frozen product cross docking system as well.

The research will be conducted following the guidelines set by the faculty of management and organisation of the University of Groningen

The field research will take until the start of February 2005

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The final report will be finished by the end of May 2005

2.7 Data collection

Data was collected through the three main ways of collecting data. At first the use of existing information, second the collection of data through oral or written interviews and third through observation

.

The use of existing information was the main way of data obtaining because of the existence of product, consumer en supplier information. This information is mainly available in Makro’s database and was used for designing the cross docking system and calculating the economical analysis.

Oral interviews were used to gather information about specific topics and research areas.

Especially Makro’s employees and logistic providers proved to be important sources.

Makro’s employees provided insight in the markets, suppliers and operations, which is important information for the cross docking design. The logistic providers were interviewed to gather cost calculation information, for example salary of facility staff and truck costs.

A visit to Thailand was performed to benchmark the cross docking system there. This system, the preparation for this system and the results were observed. The collected information will be used to avoid operational problems in the cross docking design, learn from their experiences for the cross docking design and compare the expenses and incomes for the economical analyses.

The following paragraph will provide insight in the quality of the used data.

2.8 Data quality

The former paragraph described how data is collected. This paragraph will describe the quality of the used data. De Leeuw

states that a research has to be performed ’properly’.

This includes the validity and reliability of the measured information. Validity of the used information will be described first, where after the reliability will be described.

The purpose of validity is measuring what is supposed to be measured. Three types of validity exist

:

1. Construct validity: establishing correct operational measures for the concepts being studied.

2. Internal validity: establishing a causal relationship, whereby certain conditions are shown to lead to other conditions, as distinguished form spurious relationships.

3. External validity: establishing the domain to which a study’s findings can be

generalized

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Critics of case studies often point to the fact that a case study investigator fails to develop a sufficiently operational set of measures and that ‘subjective’ judgments are used to collect data

. To increase the construct validity, multiple sources of evidence, are used.

Multiple sources of evidence provide multiple sources of measures of the same phenomenon, which addresses the problem of validity. This research uses multiple sources of evidence, such as interviews, observations and written sources.

This research will establish causal relationship, since advantages and disadvantages of cross docking will be described. Internal validity will be increased by studying written sources, benchmarking cross docking dry and benchmarking Bangkok’s cross docking system. The results of introducing cross docking fresh and frozen are therefore mainly underpinned by experience.

External validity deals with the problem of knowing whether a study’s findings can be generalized beyond the immediate case study. The subject of this research is to design and determine the results of a cross docking system for Makro Malaysia specifically.

Generalization into theory is not where this research aims at.

The purpose of reliability is to be sure that, if a later investigator followed exactly the same procedures as described by an earlier investigator and conducts the same study all over again; the later investigator should arrive at the same findings and conclusions. The goal of reliability is to minimize the errors and biases in a study. One prerequisite for allowing this other investigator to repeat an earlier study is the need to document the procedures followed in the earlier case

. The problem of reliability will be approached in this research, by clarifying sources and providing the used information. The references to the functionaries spoken to where possible with names, references to literature used and other documents retrieved in Malaysia, will be provided in the endnotes. Calculations of the economical analyses in chapter six required extensive market information such as, employee salary, transport rates and equipment cost. This information is likely to change during time. The collected information and used numbers will therefore be provided in the appendix of chapter six.

This chapter clarified the reason for this research as well as the research approach. The

following chapter will answer sub question one by describing theory.

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3 Theory

3.1 Introduction

This chapter will describe a theoretical framework to answer sub question 1. An extensive literature overview will be provided to discuss the way cross docking is addressed in theory.

The first paragraph will be discuss what cross docking is, where after ideal conditions for success will be described in paragraph 3.3. Different cross docking systems will be described hereafter and this chapter will finish with general advantages and disadvantages of cross docking.

3.2 What is Cross Docking?

Many companies have achieved significant improvements in their manufacturing operations lately. Now, these companies focus their efforts on improving the efficiency of their logistics and distribution operations. With increased product proliferation, the average demand for the individual product is becoming smaller and yet the variability in individual demand is increasing. Moreover logistic costs now account for more than 30%

of the sales dollar

. This has made the task of managing the supply and distribution network very challenging and critical indeed. One innovative warehousing strategy that has great potential for controlling the logistics and distribution costs while simultaneously maintaining the level of customer service is cross docking.

A simple definition of cross docking is: Cross docking is a warehousing strategy that involves movement of material directly from the receiving dock to the shipping dock with a minimum dwell time in between

.

Or a more detailed definition according to Coyle at al

: Cross docking is an operation that facilitates the product mixing function. In a cross-docking operation, products from different suppliers arrive in truckload lots. But instead of being placed into storage for later picking, they are moved across the warehouse area to waiting trucks for movement to particular customers. The incoming materials are picked from the delivering truck from temporary storage locations to fill a specific order and moved across the dock to a truck destined for the customer. The whole process is completed in a matter of hours.

Excess product and small items are stored temporarily to await scheduled deliveries and to permit sorting of inbound loads of mixed products.

Figure 3-1 shows the structure of cross docking. Stock provided by the suppliers is

transported to the distribution centre, through the inbound docks. Once received and

checked it is sorted into the required order profile and transported through the outbound

dock to the pre-determined store. Consequently, inbound volume should be equal to

outbound volume. At the end of the working shift little or no stock should remain in the

distribution centre.

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Package delivery services, such as Federal Express, the United Postal Services, and the US Postal Service provide prototypical examples of the cutting edge in cross docking. At package delivery companies, everything they receive from the shipper is sorted and shipped out to the receiver as soon as possible. Thus, hardly any inventory is held in the system, and no provision is made to store it. The incoming items are kept on the move all the time, and often the incoming items are sorted and turned around in just a few hours.

These described operations offer significant reduction in bottom line costs. With product received and shipped immediately, storage is eliminated and inventory is reduced.

Consequently all costs associated with handling and holding that inventory are also reduced or eliminated. Economies in transportation costs are realised in cross docking by transporting goods through the distribution channel in full truck loads (FTLs).

Traditionally, use of FTL shipments increases the level of average inventory in the distribution channel. But in cross docking, significant reductions in transportation costs are achieved without increasing the average inventory levels and at the same time providing a high level of customer service.

Figure 3-I Structure of cross docking

Suppliers Stores

o u t b o u n d i

n b o u n d

Information to WMS

Information to stores

Information to WMS

D.C .

Suppliers Stores

o u t b o u n d i

n b o u n d

Information to WMS

Information to stores

Information to WMS

D.C .

25

Cross docking allows firms to meet and support specific needs of customers such as just- in-time practices, the consolidation of multiple supplier networks, the launching of specific promotions and other marketing strategies. Cross docking also has other benefits, such as reduction of the order cycle time, which helps to improve the flexibility and responsiveness of the distribution network

.

In this paragraph described how cross docking works and how logistic and distribution costs can decrease while simultaneously maintaining the level of customer service. Two examples, that show the results of implementing cross docking, will conclude this paragraph.

Today, cross docking is practised within both manufacturing and retailing companies. A company that has been very successful in using cross docking is Wal-Mart

. Wal-Mart uses a Hub and Spoke network to distribute its products to its retail outlets. Items from vendors arrive at a distribution centre as FTL shipments. At the distribution centre, the FTL shipments from various suppliers are broken up and consolidated again to create FTL shipments that go to the various retail outlets. The items stay in the distribution centre for very little time and ideally move directly from the inbound dock to the outbound dock. Cross docking has helped Wal-Mart reduce its costs and has enabled the introduction of an every-day low price (EDLP) strategy. This has helped Wal-Mart improve its market share and profitability

. Office Depot is another major user of cross docking strategy. Over the past 6 years, Office Depot has expanded the retail portion of its cross docking programme to involve more than 400 vendors and 55% of its stock keeping units (SKUs), representing 75% of dollar volume

.

3.3 Ideal conditions for success

The way cross docking works and the cost and service level benefits of cross docking is

discussed. In despite of these benefits not all firms are able to benefit from a cross

docking system. An organisation that wants to operate a cross docking system will need

some essential elements to benefit of the system

. The ideal conditions for success will

therefore be described. Figure 3-2 shows the essential elements, which will be discussed

individually afterwards.

26 The right products

An ideal cross docking program moves appropriate products at reduced costs. These are products that are in pre-mixed or pre-consolidated pallets that require minimum handling upon receipt at the cross-dock operator’s facility. These are products that have high inventory carrying costs, which can be significantly reduced with cross docking. These are products that have bar-coded labels attached to the pallets with product information readily available so they can be routed immediately after a single scan. These are products that have predictable demand patterns so that their shipment can be accurately anticipated and properly scheduled. These are products that have low stock out costs while cross docking strips the system of safety stocks traditionally held at the warehouse.

Consequently, cross docking raises the probability of stock-out situations.

The right suppliers

Ideal cross docking should have suppliers who have the right processes in place so that they can consistently provide the correct quantity of the correct product at the precise time when it will be needed. These are the suppliers who are capable of configuring products for efficient handling through the next point in the chain, are always in communication with the other supply chain members and always provide the necessary feedback. If a supplier is able to label and pre-sort products on pallets, the system will be able to work quickly and ship with minimal handling. If not, sortation may be required, increasing the complexity of the operation.

The right information flow

Ideal cross docking must have a timely, accurate, preferably paperless information flow amongst trading partners and a smooth, continuous product flow that is matched to actual demand. Proper flow of information enables improvement of logistics planning and

Figure 3-II Essential elements for cross docking

Product Supplier

Information flow Product

flow

People Cost

Ideal Cross Docking Program Product

Product Supplier Supplier

Information flow Information

flow Product

flow Product

flow

People People Cost

Cost

Ideal Cross Docking Program

Ideal Cross

Docking Program

27

optimisation of transportation and inventory costs. Timely and accurate information is also essential for reducing the order cycle time and for improving the flexibility and responsiveness of the supply chain network. The information technologies used in cross docking, as in supply chain management, include electronic data interchange (EDI), shipping container marking (SCM), bar-coding of products using universal product code (UPC) and scanning of bar-coded products to record sales to customers at the point of sales (POS)

.

The right product flow

Ideal cross docking should have the appropriate network transportation, facilities, equipment and operations in place to support the flow of the product from the supplier through the distribution centre to the customer. Where sortation is required suitable material handling equipment and operations should be appropriately designed. Facilities should be configured to accommodate the operation whether it is pure cross docking or a mixture of cross-docking and traditional ’’store-and-ship’’ warehousing. Transportation should be set up to offer prompt and efficient support to operations in the facilities of each trading partner.

The right cost

As with any operating strategy, cross docking should only be performed if proper analysis and cost justification has been conducted. Any capital laid out to create the system should provide management with an acceptable and realistic return on investment.

The right people

Ideal cross docking is carried out by personnel who recognize the urgency of moving products rather than storing it. They consistently track performance to determine strengths and weaknesses and they acquaint themselves with the latest technology to determine how to best use it for their business. These are also people who are able to negotiate and coordinate with suppliers and customers.

The described elements show that not all organisations, products and suppliers are able to benefit from the advantages of cross docking. Most warehouses that use cross docking do not operate as a pure cross-docking warehouse. Rather, they operate as hybrid warehouses, where cross docking is only used for some items and traditional warehousing and distribution strategies for other items. This traditional strategy is used for items for which larger inventories are kept to ensure good customer service and low lost sales. For example, at Wal-Mart cross docking is practised for big ticket shopping goods and speciality items such as apparel that are pre-processed to make them floor ready in a warehouse specialised for that task. In addition, a few weeks worth of inventory is maintained for fast moving staple goods, since higher level of stock availability are required for these items to minimise lost sales

.

This paragraph provided an overview of the elements for the ideal cross docking program

that must work together. From these elements can be concluded that cross docking,

although simple in concept, is not appropriate for all organisations. Another major

obstacle to implement cross docking is not knowing how to make it happen

. Cross

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docking not only cuts across many interacting functions but it takes a wide variety of forms as well. The different cross docking types will be the subject of paragraph 3.4.

3.4 Types of cross docking

Authors and logistic managers define cross docking, but many of them disagree with the generic use of the term

. Cross docking takes on a wide variety of forms, from simple full pallet movement to complex sortation systems. Different types of cross docking will therefore be described in this paragraph.

In this research the different methods of cross docking is based on the point of consolidation and the point of allocation. The point of consolidation refers to where in the supply chain the orders for the same customer are physically assembled in preparation for shipment. The point of allocation refers to when a determination of final product destinations can be made. There are two kinds of final product destination: pre-allocated and post-allocated. If product is pre-allocated, the final product destination is determined before the products are shipped to the distribution centre. In post-allocation, final destinations are determined only after the products are shipped from the supplier. These three different methods are compared in the figure 3-3 and thereafter discussed individually.

Types of Cross Docking systems

At the time of order

Supplier DC Information

system Pre-allocated

supplier consolidation

Specific Store distribution is known

Builds and ships store specific pallets (labelled)

Transfers loads direct to shipping

Directs to outbound door

Pre-allocated DC consolidation

Specific Store distribution is known

Ships pallets of SKU (may or may not be labelled)

Builds Store specific pallets

Sorts by store and directs to outbound door Post-allocated DC

consolidation

Only DC level distribution is known

Ships pallets of SKU (not labelled)

Builds store specific pallets

Allocates to open orders per store, sorts per store, and directs to outbound door Figure 3-III Different types of cross docking

29

3.4.1 Pre-allocated supplier consolidation

This is a commonly preferred cross docking operation because it requires the least handling within the cross dock facility. This method of cross docking is only possible if the following conditions exist:

• Products can be allocated to specific customer before the supplier ships them.

• The supplier is capable of building and shipping customer specific pallets based on their specifications.

How it works in the supply chain

I. The supplier receives a purchase order from a customer with instructions on how products should be distributed to each store II. The supplier builds a unit load, typically on a pallet, of different

SKUs for a specific store or plant

III. The supplier applies labels on the load, which represents all products on the pallet and includes the end destination

IV. The supplier ships the load to arrive on the same day that the stores are to be replenished by the DC

V. At the DC facility, the load is identified, verified against a receiving invoice and transported to the shipping area

VI. Two things can happen to the unit load. It can be transferred directly to an outbound door, designated for a specific store, plant, or geographic area, and into a waiting trailer, or it can be staged awaiting the arrival of the outbound truck for consolidation with other unit loads for the same store or geographical area.

VII. The unit load is intended solely for one end destination. It is never broken up into individual cartons or pieces.

VIII. The unit load is shipped to the store or plant where the contents are received and verified.

Points to consider

• Significant reduction in warehousing activities.

• No inventory.

• Heavy dependence on suppliers.

3.4.2 Pre-allocated DC consolidation

With the first method, the supplier is required to assemble SKU’s on a pallet. In the pre- allocated DC consolidation method, the responsibility of segregating products by store is placed on the DC. Sorting at carton level increases the complexity of the process for the DC. Products are still pre-allocated in that each carton has a known destination before it enters the DC. The allocation of SKU’s is also predetermined.

How it works in the supply chain

30

I. The supplier receives a purchase order from a customer that indicates aggregated requirements at the facility or distribution centre level. The store may or may not include instructions on how products should be labelled for the individual store II. If instructions are included, the supplier attaches labels to each carton before

consolidating by SKU. If no instructions are included, the supplier simply consolidates all products by SKU before shipping them to the DC.

III. The supplier ships the load to arrive on the same day that the stores are to be replenished by the DC.

IV. Before the SKUs arrive at the DC, the supplier sends the DC a detailed report of the contents of the impending shipment

V. Since specific allocations are made before the time of receipt at the DC, each item has a known destination after it arrives at the DC

VI. If labelled by the supplier, product will enter the DC ready to flow through the system. If not, the DC applies the appropriate labels.

VII. Product is then transported either by a lift truck to a picking area where cartons bound for the same store are consolidated and palletised.

VIII. The consolidated unit load is transferred either directly to an outbound truck or to a staging area for later loading

IX. The unit load is shipped to the plant or store where the contents are received and verified.

Points to consider

• Works well for less than pallet quantity orders per customer.

• Additional handling by the DC required.

• No inventory.

• Partial reliance on suppliers.

• Higher initial investment.

3.4.3 Post-allocated DC consolidation

In the previous method, the DC has determined the product allocation for specific stores before the product is shipped. In this method, there is no pre-allocation and no external reliance on the supplier. A product’s final destination until after it is en route to the DC.

In this approach, the ideal product to cross docking has a constant and continuous demand pattern that is easy to predict. In addition, to fully maximize the benefits of such a system, the DC has information and material handling systems that enable handling the physical product to remain in synch with the flow of information in real time. Once received, cross docking products may be placed in a ’’hot processing area’’ and used for immediate order selection. Replenishment of the product is on a just-in-time basis from the supplier. Products are still sorted and palletised by store

How it works in the Supply Chain

I. The supplier receives purchase orders from the customer that indicate aggregate requirements at the DC level and the required shipping dates.

II. The supplier consolidates all products by SKU before shipping them to the DC.

31

III. The supplier ships the product to arrive shortly before the store is to be replenished.

IV. Before the SKUs arrive ate the DC, the supplier sends the DC a detailed report of the content of the incoming shipment.

V. Hours before the trailer arrives, the DC starts allocating the SKUs arriving that day to current orders and calls for replenishment to specific customers scheduled for delivery

VI. Products are received at the DC and identified as ’’hot-product’’

VII. Products are transported to a ’’hot processing area’’ near the shipping dock VIII. Warehouse personnel pick, label and load orders for the stores as required

IX. At the end of the day, remaining cartons, may either be staged for processing the following day or placed in storage

X. The consolidated unit load is transferred either directly to an outbound truck or to a staging area for later loading

XI. The unit load is shipped to the end destination where the contents are received and verified

Points to consider

• Little or no reliance on the supplier.

• Additional handling in the DC.

• Inventory is substantially reduced, but may not be totally eliminated.

• Works well for less-than-pallet carton quantity orders per SKU per store.

• Higher initial investment.

This paragraph described three different cross docking systems: pre-allocated supplier

consolidation, pre-allocated DC consolidation and post-allocated DC consolidation. The

explanation has shown that there are many differences between the systems. It is

important to understand the different systems for designing a cross docking system, since

every system has different requirements for the products, suppliers, product flow,

information flow, people and costs (The five mentioned elements of a cross docking

design). Figure 3-4 summarizes the differences in essential element requirements of the

three systems and is based on the described cross docking systems.