Improving the operating performance for the warehousing of De Vries Transport Group

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Improving the operating performance for the warehousing of

De Vries Transport Group

Master Thesis

Diagnoses Research Project University of Groningen

Faculty of Economics and Business MSc Technology Management

Supervisors University of Groningen

MSc H. van der Meulen Dr. E.P. Jansen

Supervisor De Vries Transport Group Veendam

K. Bode

Author

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2 Acknowledgement

First of all I would like to thank De Vries Transport Group for giving me the opportunity to perform my final research project in this company. Performing my final research project within this dynamic environment with a pleasant work atmosphere resulted in a valuable and joyful time.

During this research many people at De Vries Transport Group helped me. I would like to thank all those who have contributed to the completion of this research. In particular I would like to thank Kees Bode for coaching me during this research and for the numerous times providing me with constructive feedback on many issues.

Furthermore I would like to thank Hendrik van der Meulen for his feedback on the research and this thesis. The approach to the research and the structure and readability of this thesis improved strongly thanks to his valuable comments. I would like to thank Pieter Jansen for his insightful feedback and for reviewing this thesis.

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3 Management summary

In this master thesis a research has been carried out, to see if the performance of the warehousing facility, of De Vries Transport Group in Veendam, could be further improved. This has been done by examining how the cost efficiency could be improved. In the first part of this report the objective and problem situations are being stated. This is followed by the methodology part, in which is explained how information and data was gathered and has been analyzed.

A literature review helped to get familiar with previous work of other researchers and served as background information, which was used further on in this research. The literature that is elaborated can be split into three different parts. The first part is about the various storage systems, then the literature about layouts follows and finally literature about operational performance has been consulted.

Current situation:

An analysis of the current situation brought up the following issues:

- Large variety in throughput times with the inbound and outbound activities.

- The storage of products in rows is mixed with different types of products and is quite deep (sometimes 20 pallets deep)

- Sometimes products can be hard to find

- Lots of internal transportation, causing extra damage to products - Different warehouse management systems

By rearranging the direct/indirect costs, based on handling activities, a new financial overview has been made. This provided more insight where costs arise. Useful information that was found for example, was that in warehouse E, where pallet racks are already implemented about 10-15% less direct costs occur.

Layout:

If floor stacking is used, it is important to optimize the layout of the warehouse facility, this is necessary due to the continuous changing amounts and sorts of products. Tompkins provides a method which can be used to calculate the ideal row depth of a batch. It further provides the opportunity to calculate the amount of aisles needed. This method can be used to further improve the layout and so improve efficiency of the storage of products.

Warehouse Operation:

By implementing class based dedicated storage a significant amount of travel time can be reduced. The warehouses can be divided into different classes, in which a certain category of products can be stored randomly. This has as an advantage that it will reduce travel time and so increase efficiency. However this will need careful planning and further analysis of the current and further product characteristics.

Dual command cycling:

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ABC analysis:

The ABC analysis has been made to see which handling activities are most profitable. This profitability depends on the time how long it takes to fulfill an order. Due to the large variety in throughput times in the current situation it is difficult to see which activities are most profitable. When a pallet rack storage system is used, it is much easier to plan and control the activities, because all pallets are directly accessible. For the in and outbound activities the norm time for which an order is profitable can be calculated. This depends on the rate and type of activity. When the time for an order is registered, it can be compared with the actual time it takes and this can be used to further improve efficiency.

Business cases:

Finally a number of business cases have been developed to see the financial consequences of the suggested improvements. For the current situation and three other alternatives the business cases show the financial prospects till 2015. Hereby assuming a 3% increase in prices and costs and 7% cost of capital. Further a 10% decrease in work force is assumed caused by implementing dual command cycling and a 5% decrease caused by pallet rack storage.

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This chapter provides the reader with an introduction into the subject matter of this report. The origin of the research project is discussed and the structure of the report is specified. This is followed by a description of the activities of the De Vries Transport Group (DVTG), especially those of the warehousing department in Veendam.

1.1 Introduction dissertation

The ever increasing trend towards more product variety and short response times has placed a tremendous emphasis on the ability to establish smooth and efficient logistics operations. These operations play a vital role in the competitiveness of the customers, since logistic costs constitute an important part of their overall production costs. The efficiency and effectiveness in any distribution network is largely determined by the operation of the nodes in such a network, i.e. the warehouses.

De Vries Transport Group wants to make their warehousing activities more efficient. In order to increase the profitability, this research wants to give more insight in the business processes. Recommendations will be given on how to improve the warehousing activities in the future.

1.2 Report structure

This report has a clear structure, which contains three steps as you can see in figure 1.

1. Introduction

Chapter

_Steps

2. Research Area 3. Research Methodology 4. Literature Review 5. Current Situation 6. To-Be Situation

Identify and state the

problem and objectives

Analyses

Phase 1: Theoretical

framework &

research

Phase 2: Practical

research

Phase 3: Advice

7. ABC & Business cases

8. Conclusion & Recommendations

Redesign Process

Figure 1: The structure of this report

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8 1.3 Motivation for research

The management of De Vries Transport Group initiated the research at the warehousing department. Due to sharply priced contracts with customers in the past, the profitability of the warehousing needed to be further improved. The management had the impression that not all warehouses performed as good as other warehouses. They wanted to have more insight in where costs savings can be made in order to increase the performance.

The main research objective can be stated as follows:

“Identify and research the possibilities of cost savings within the warehousing department in Veendam”

There are several reasons why the warehousing department in Veendam is investigated. The management of DVTG are convinced that severe improvements can be made there. The warehousing in Veendam is the largest and most important warehouse facility of DVTG. All kinds of main activities are influenced by this warehouse. The warehouses in Veendam are interesting to investigate, because the main working methods has not been changed in the last decade, according to the management. By examining the warehousing facility in Veendam, it might be possible to generalize certain aspects and come up with a general approach that is applicable for other warehouse facilities.

From this main objective several sub objectives can be derived, these are the following:

1. To provide DVTG with transparency of the existing warehouse processes and the respective costs. 2. To identify and define the possible improvement areas in the warehousing activities. This

objectives have been split into three parts:

a. To discover and analyze the possible improvement areas.

b. To make recommendations to achieve cost savings of at least 20% of the total direct costs of DVTG in 2008 (€ 2.294k).

c. To provide the management of DVTG with an advice for implementation of the suggested improvements.

To be able to identify problems and improvement areas, the existing processes and costs are further examined. A better understanding of the current working methods leads to more insight and helps to make recommendations to achieve cost savings. The main objective and sub objectives need to correspond with the overall strategy of DVTG. This strategy will be further elaborated in §1.5.3.

1.4 De Vries Transport Group

De Vries Transport Group (DVTG) is one of the larger international logistic service providers in the north of the Netherlands. The head office is located at Veendam (The Netherlands). They have branch offices in Leeuwarden (The Netherlands), Coevorden (The Netherlands), Rostock and Moers (Germany) and Bor (Czech Republic). DVTG is a third party logistic provider, which means that they store and transport goods for other companies where logistics is not a core competence.

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Chapter 1 – Introduction 9

H

G

F

E

A

B

C

_D

Figure 2: General Map Warehousing Veendam

1.5 Warehousing Veendam

De Vries Transport Group consists of multiple departments. This research has been done at the warehousing department in Veendam. This warehouse is a multimodal storage and transshipment terminal. DVTG in Veendam has the facilities of a train terminal, a container terminal and an inland shipping terminal at its disposal. They also offer the possibility to store goods as well as containers. De Vries Transport Group exploits a railway service for container transport to Amsterdam, Rotterdam and destinations in northern Germany and Scandinavia (www.devriestransportgroup.com, 2009).

The warehouse locations vary in size, as you can see in Table 1. The different layouts of the locations are shown in the appendix.

Warehouse Size Main Customers

A 11.900 m2 Friesland Foods, A&R Carton

B 10.000 m2 Friesland Foods C 10.000 m2 Friesland Foods &

AVEBE D 11.200 m2 AVEBE, Flint E 14.750 m2 Friesland Foods, Brunnermond, PPL Leeuwarden F 8.625 m2 BASF, Caparis, Bosma G 9.750 m2 Brunnermond, BASF, PPG Chemicals H 13.700 m2 PPG Chemicals, Yamaha, 7.700 m2 PPG Chemicals, Meelunie, Smurfit, Cordial, Flint 8.800 m2 1-5 2.600 m2 2.750 m2 2.750 m2 Total 113.825 m2

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1.5.1 Customers

Reasons why companies store goods in warehouses are:

 To better match supply with customer demand, one of the major challenges in managing a supply chain is that demand can change quickly but supply takes longer to change. Surges in demand, such as seasonality‟s strain the capacity of a supply chain. Similarly, warehouses can buffer the supply chain against collapsing demand by providing space in which to slow or hold inventory back from the market. Warehouses allow to respond quickly when demand changes.

 The response time may be a problem when transportation is unreliable. This can be caused by congestion, bureaucracy, weather, road conditions, and so on. This results in longer and variable lead times. A warehouse helps to control variances in lead times, and so provide better customer service.

 Warehouses can also buffer against sudden changes in supply. Vendors may give a price break to bulk purchases and the savings may offset the expense of storing the product. Similarly, the economics of manufacturing may dictate large batches to amortize large setup costs, so that excess product must be stored. And warehouses provide a place to store buffer against unreliable demand or price increases.

 To consolidate product, to reduce transportation costs and to provide customer service. To provide the possibility to freight full truck loads, a warehouse can function as a cross docking facility, where different freights can be combined.

1.5.2 Stored and handled products

There are different types of products stored in the warehouses, for all kinds of different customers. They store mostly bulk products for the food industry, where AVEBE and Friesland Foods are two large customers. But also paper board or chemicals are stored in the warehouses.

The products which are stored and handled vary in size, activity, weight, volume etc. A product unit load can be shipped as a whole pallet, but may also contain multiple cases, or so called stock keeping units (SKU). A SKU is the smallest physical unit of a product that is tracked by an organization (Bartholdi & Hackman, 2008).

Not all products can be stored near each other, due to food regulations or customer demands. Certain products cannot be stacked, because they have a limited strength. Most products that are stored and shipped by DVTG are unit load products, pallets with boxes, sacks or big bags. They rarely store mixed pallets, where multiple different SKU‟s are stored on a single pallet. If there arrives a mixed pallet, these are split up in to multiple pallets and stored like this, although this is not a common activity.

1.5.3 Strategy

Porter (McGee, 2006) suggested that there are three generic strategies to choose from, and each business unit can have its own strategy. According to Porter, a business can strive to supply a product or service more cost-effectively than its competitors (cost leadership), it can strive to add value to the product or service through differentiation and command higher prices (differentiation),or it can narrow its focus to a special product-market segment which it can monopolize (focus).

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Chapter 2 – Research Area

11 2 Research Area

In this chapter the initial problems in the logistics activities of the warehousing are identified. This is followed by a description of the course that this report takes. The problems that will be looked at are stated and the method of action is studied. This chapter finishes by determining the questions that will be answered by this research and the chosen restrictions.

2.1 PH analysis

The PH-analysis (De Leeuw, 2000) has to result in a comprehensible answer to the following questions; who has problems with the functioning of the (sub) systems in the organization and what are they? The answer should give rise to the relationships between the problems.

A problem is defined by De Leeuw ( (De Leeuw, 2000) as a situation of subjective discomfort of a PH („probleemhebber‟) combined with the desire to change this. This discomfort arises through three factors: objective (the subjective wishes), perception (the reality through the eyes of the PH) and the reality. By interviewing employees at different levels in the organization, different views are obtained of the problems occurring in the organization. These levels are strategic, tactical and operational. Some of the questions asked during the interviews can be found in the Appendix.

Warehouse manager (strategic)

1. The clarity within the logistics activities is sub-optimal. Most of the warehouses have more than one customer. Each customer has different demands, contracts and products to be dealt with. The allocation of various costs is complex and transparency is therefore low. The warehouse manager further assumes not all made contracts are suitable for efficient and profitable logistics. More insight in where costs occur can perhaps provide useful information to increase efficiency.

2. The warehouse manager finds it difficult to define the performance of the various warehouses. This makes it difficult to compare the performance of the warehouses, like the various warehouses in Veendam or other warehouses of DVTG.

3. The storage method (floor stacking) is not suitable according to the warehouse manager for all products which are currently stored. Costs savings might be possible when picking another storage method.

Customer service department (tactical)

1. The various lead times of products makes transport planning difficult. Customers need to know when orders can be picked up or delivered. When the lead time of an order varies all the time, it is difficult to schedule all in and out coming orders. A more constant and shorter lead time makes transport planning more efficient.

2. Damaged and missing products causes problems with the customer. When a product is missing or damaged the customer needs to be informed and a procedure starts how to deal with this problem. This takes time and has all kinds of negative effects on the performance of the warehousing department. The decrease of missing or damaged product will lead to a more efficient and profitable warehouse.

Warehouse coordinator (operational)

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12 also makes planning of personnel difficult, because it is difficult to know how long orders will take.

2. Most products are not direct accessible. Lots of internal movement is necessary to obtain the right pallet for transportation. Products are stored in rows, with various depths, and are mixed with different products. This causes extra damages of products due to the necessary extra internal transport of products. Missing products causes extra costs and unsatisfied customers. A reduction of missing products and decrease of damages will increase the performance of the warehouse. Now the main problems have been defined. Based on different definitions De Leeuw distinguishes three types of problems:

- „Perceptieproblemen‟, are problems (by the opinion of the researcher) who can be solved by adjusting the perception .

- „Doelproblemen‟, are problems that occur because the „probleemhebber‟ has unfeasible and unrealistic desires. This can be solved by adjusting the objectives of the „probleemhebber‟.

- „Realiteitsproblemen‟, are problems for which a solution needs to be found by changing the reality.

The PH-analysis has revealed several „realiteitsproblemen‟. These problems for the warehousing department have been summarized and defined by the researcher as followed:

- Non transparent cost allocation system, costs are only allocated per warehouse; costs per customer or per in/outbound pallet are not addressed.

- Difficulties to compare the performance of the various warehouses. - Variable lead times for all kinds of products

- Missing products or damaged products cause a decrease in performance of the warehousing Since the main problems are now clear, an objective for this research is now defined in the following paragraph.

2.2 Objective and problem areas

The main objective of this research is to obtain information and knowledge so that an advice can be given about possible measures, or investments that can be taken, in order to improve the general performance of the warehouse by reducing costs, whereby labor costs are the most important variable cost factor. Possibilities that are not yet realized or potential opportunities for the future will be investigated to improve the performance of the warehouse.

2.3 Stakeholder analysis

In this paragraph the stakeholders are defined and elaborated. A stakeholder analysis clarifies the system barriers of this research project (De Leeuw, 2000). Where the PH analysis is internally focused, the stakeholder analysis also looks externally. This type of analysis should answer the following questions±

- Who are stakeholders and which function has the organization for each of them?

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2.3.1 De Vries Transport Group

The desires of DVTG are to deliver a high quality service, as efficient and profitable as possible. Therefore it is necessary for DVTG to improve the efficiency of the warehousing department, since this is an important part in the total organization. A logistical service provider which main activities are to handle multimodal stored products needs to have an efficient warehouse, because this affects also the other departments, like rail, cargo and bulk.

2.3.2 Cooperating Partners

The partners where DVTG are working with and which support the activities in the warehousing. These can be charters, the transport organizations which transport products from and to the warehouse. But also the partners for rail transportation or bulk transport. A good relationship and an efficient cooperation with these partners will lead to a more stable organization.

2.3.3 Customers

The warehousing and commercial department of DVTG are both in contact with the customers. The main desires from customers of DVTG are, the price, a competitive process is most decisive for customers and

quality, the quality of the provided processes consists of reliable deliveries and storage of products. The

speed and reliability of the delivery must be of a high quality. However when the strategy of DTVG is cost leadership, the emphasis of the organization should be to reduce costs and provide a competitive price. Good contact and communication with customers is also very important.

2.3.4 Employees

For the employees of DVTG it is there every day job to work at the warehouse facility. A good functioning warehouse facility helps to deliver good work in terms if quantity and quality. A well functioning warehouse provides job and income security, more opportunities for promotion, and more possibilities to follow training and education. It is therefore in their interest that the warehousing facility increases its performance.

2.4 Research question

Now the objectives and main problems have been addressed, the research question can be formulated. The aim of this research is to answer this main questions the best way possible, given the restrictions.

2.4.1 Main research question

The main question is:

In which areas and how can the cost efficiency of DVTG warehousing improve?

This research question is somewhat global. Therefore a number of sub questions should clarify the main question. By answering these sub questions, an answer can be given on the main research question.

2.4.2 Sub questions

The sub questions that will be answered are:

1. Should some of the warehouses be equipped with different storage equipment?

This first question needs to be answered because more optimal storage equipment can provide big cost efficiencies. Mainly because this equipment causes a bottleneck in storage capacity and it has a big effect on the operating performance.

2. Is there an improvement possible in the lay-out of the different warehouses?

By examining the lay-out of the warehouse facility a more optimal lay-out might provide shorter routes and shorter throughput times, which results in a more cost efficient organization.

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14 3. Which improvements can be made in the operation strategy of the warehouse?

This third question should answer if changes in the operating system can reduce costs. A different in/outbound system can perhaps reduce loading or unloading times, or make this more flexible.

4. What are the predicted financial consequences with the new design and operation strategy?

To be able to answer the question what kind of effects the recommendations have on the organization, an analysis must be made to predict the financial consequences.

2.4.3 Restrictions

 This research examines only the warehouses in Veendam (warehouse A-H & 1-5), and does not examine other warehouses or other branches of De Vries Transport Group.

 Only the existing warehouses are included, new warehouse are not discussed or take into account.

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Chapter 3 – Methodology 3 Methodology

The methodology explains why and how this research has been done. The methodology contains a research program and the method for data gathering is described.

3.1 Research Program

This research has been built up out of three methodologies. It commences with a diagnosis and changes to a business process redesign methodology, further an activity based costing analysis is used.

3.1.1 Diagnosis

In this report the research objectives together with the diagnosis are used to derive the main problem. The main problem forms the basis for the research questions (see paragraph 2.4.2). The diagnosis can be viewed as all the activities that are carried out to obtain a starting point for (re-)designing, even if no specific problems have previous been stated (De Leeuw, 2000).

The main diagnostic tool that is used in this report is the PH analysis (see paragraph 2.1). It provides an overview of the problems stated by the different actors at De Vries Transport Group. During qualitative and quantitative analysis of the existing as-is phase, other problems may appear.

Once the problem is clear and discussed the literature review in chapter 4 provides the theoretical background of the problem. This chapter is also provides additional structure to the report, because it gives insight in the problem/ improvement areas that are frequently found.

3.1.2 Business Process Redesign

Business Process Redesign (BPR) is the methodology used to improve the existing processes and hereby improve the performance of the warehousing facility. It helps to increase the qualitative part of the processes by increasing the productivity of the employees and quality of the performed work.

3.1.3 Activity Based Costing

This helps to identify the costs that are made in the warehousing facility. To give insight in where costs occur and how these costs can be addressed towards handling activities for example. When this analysis has been made, insight in the processes is more clearer and possible areas where costs can be saved are identified.

3.2 Data gathering

In order to gather data different techniques and sources can be used. This part of the research looks where the data can be found and which data is available. The sources and techniques are provided in Table 2.

Activity Sources of data Optional techniques Current Situation Reality Process flowcharting

People Interviews

Documentation Cost modeling Cost information

To-Be Situation People Interviews

Literature Benchmarking

Cost information Value analysis Brainstorming Process modeling Comparative analysis Cost modeling Table 2: Data gathering

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Chapter 3 – Methodology

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Benchmarking

Benchmarking is a method used; in which organizations evaluate various aspects of their processes in relation to the best practice, usually within their own sector (Hackmann, et al., 2001). Internal benchmarking is used in this research, where the different warehouses are compared with each other and processes are evaluated. External benchmarking, where DVTG will be benchmarked with another logistical company is not used in this research.

In order to benchmark the various warehouses, different documents have been gathered and used. The most important documents that were used are the financial budget and income statement of 2008. These have been used to investigate the financial situation.

In order to benchmark the norm times of various inbound and outbound activities, a schedule has been made. These schedules can be requested on demand by the author. The results of these are discussed in chapter 5.

Quantitative information

The quantitative data was gathered, mainly by using the warehouse management system „LOTREX‟ and financial reports of the DVTG. Other documentation from the customer service department also helped to find additional information. Including:

- Load and unload forms, which summarizes the orders of a period (day or week)

- Delivery schedules, these contain the orders that have to be dealt with, and the amount of pallets etc.

- Personnel planning lists, contains overview of staff and there activities - Overviews of amount of pallets stored per customer

- Damage reports

- Financial overview, revenue of warehouses for handling activities, storage etc. - List of rates of customers

- Cost prices for storage, (not very accurate actually)

Further interviews helped to interpret the data correctly. Information can be requested on demand, however most financial data and rates are confidential, and so will only be dispersed by DVTG.

Qualitative information

Qualitative data can be gathered by using various methods. In this research the data has been gathered through interviews, documents and by participant observation. A literature review also helped to gather useful information. The documents that have been made or used are the following:

- Map of the warehouses - Storage methods

- Questionnaires for different departments: o Commercial

o Financial

o Damage and insurance o Operational

- Checklists for customers used by the commercial department - KPI lists of customer (Friesland foods)

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4 Literature Review

The literature review will provide a brief elaboration of the literature that is used in order to answer the research questions. The literature will help to explain and support choices that have been made in the following chapters. It helps to identify problem areas, in these areas researchers study interesting innovations or trends so that improvements can be gained for others.

The chapter is split up in a warehouse design part (4.2) where the storage equipment selection and warehouse layout, and operation strategy is discussed. In the other part (4.3) the warehouse operation is discussed and elaborated.

Performance Evaluation Size and Dimensioning Equipment selection Operation strategy Department layout Overall structure Clear away of products Storage Order picking Shipping SKU department allocation Zoning SLAP Batching Routing Sortation Warehouse design Warehouse operation Receiving of products

Figure 3 Framework for warehouse design and operation

In Figure 3, a model of Gu, (Gu, et al., 2007) is used. This framework is used to find interesting literature, which is appropriate for this research. In the design part, two areas fall outside the scope of this research, due to the restrictions made in §2.4.3. The areas which are not discussed:

The overall structure, this determines the material flow pattern within the warehouse, the specification of functional departments, and the spatial relationship of departments. This is not further investigated, because this report tries to improve the current existing warehouses and does not try to determine possibilities for a new warehouse.

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18 4.1 Storage Equipment

The first area elaborated in the literature review is the equipment selection problem. This is used to determine an appropriate automation level for the warehouse, and specify specific equipment types for storage, transportation, order picking, sortation, etc.

The function of a material storage system is to store materials for a period of time and to permit access to those materials when required. Different categories of materials require different methods of storage. A description is first given about the performance measures of a storage system. Then a description is given about the types of storage equipment, divided in conventional storage methods and automated storage systems. The justification of investing in new equipment will be given in chapter 7.

4.1.1 Storage system performance

The performance of a storage system in accomplishing its function must be sufficient to justify its investment and operating expense. Various measures used to assess the performance of a storage system include: (1) storage capacity, (2) density, (3) accessibility, and (4) throughput. In addition, standard measures used for mechanized and automated systems include (5) utilization and (6) reliability (Groover, 2000).

 Storage capacity, this can be measured in two ways: (1) as the total volumetric space available or

(2) as the number of storage compartments in the system available for items or loads. Storage capacity is conveniently measured as the number of unit loads that can be stored in the system.

 Storage density, is defined as the volumetric space available for actual storage relative to the total

volumetric space in the storage facility. In many warehouses, aisle space and wasted overhead space account for more volume than the volume available for actual storage of materials. Floor area is used to assess storage density, because it is convenient to measure this on a floor plan of the facility. However, volumetric density is usually a more-appropriate measure than area density. For efficient use of space, the storage system should be designed to achieve a high density. However as density is increased, accessibility, another important measure of storage performance, is adversely affected.

 Accessibility refers to the capability to access any desired item or load stored in the system. In the

design of a given storage system, tradeoffs must be made between storage density and accessibility.

 System throughput is defined as the hourly rate at which the storage system (1) receives and puts

loads into storage and/or (2) retrieves and delivers loads to the output station. In many warehouse operations, there a certain periods of the day when the required rate of storage and/or retrieval is greater than at other times. System throughput is limited by the time to perform a storage or retrieval (S/R) transaction.

 Utilization, is defined as the proportion of time that the system is actually being used for

performing storage and retrieval operations compared with the time it is available. Utilization varies throughout the day, as requirements change from hour to hour.

 Availability, is defined as the proportion of time that the system is capable of operating compared

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4.1.2 Conventional storage methods and equipment

The equipment selection problem is to determine the level of automation in a warehouse, and decide what type of storage and material handling systems should be employed. A variety of storage and equipment are available to store the various goods. The choice of method depends largely on the material to be stored, the operating philosophy of the personnel managing the storage facility, and budgetary limitations. An overview in the appendix Table 9 is given of the various conventional storage equipment and its advantages and disadvantages.

 Floor stacking refers to the storage of stock in an open floor area. The stock is generally contained in

unit loads on pallets or similar containers, and unit loads are stacked on top of each other to increase storage density. The highest density is achieved when unit loads are placed next to each other in both floor directions. However, this provides very poor access to internal loads. To increase accessibility, bulk storage loads can be organized into rows and blocks, so that natural aisles are created between pallet loads. The block width can be designed to provide an appropriate balance between density and accessibility.

Depending on the shape and physical support provided by the items stored, there may be restrictions on how high the unit loads can be stacked. The floor stacking height is limited by ceiling height, lift truck mast height, or maximum stacking weight allowed by the product. The inability to stack loads in bulk storage reduces storage density, removing one of its principal benefits. Loads in a block should be retrieved under a LIFO (last-in-first-out) discipline (Frazelle, 2001). Hence, if highly restrictive FIFO requirements are in place, floor stacking is not a feasible storage method.

Floor or also called „block stacking‟ is particularly effective when there are multiple pallets per SKU (stock keeping unit) and when inventory is turned in large increments, that is, several loads of the same SKU are received or withdrawn at one time. As loads are removed from a storage lane, a space-loss phenomenon referred to as honeycombing occurs with block stacking. Because only one SKU can be effectively stored in a lane, empty pallet spaces are created that cannot be utilized effectively until an entire lane is emptied. Therefore, in order to maintain high utilization of the available storage positions, the lane depth (number of loads stored from the aisle) must be carefully determined. Floor stacking is currently applied in warehouses A-D, F, H & 1-5.

Rack systems provide a method of stacking unit loads vertically, without the need for the loads themselves to provide support. Several rack systems will be explained:

 One of the most common rack systems is the pallet rack, consisting of a frame that includes horizontal load-supporting beams. In a single deep pallet rack each pallet is independently accessible, and so any SKU can be retrieved from any pallet location at any level of the rack. This gives complete freedom to retrieve any individual pallet but requires relative more aisle space to access the pallets. In warehouse E and G they currently use such a system.

 Pallet stacking frames, are either frames attached to standard wooden pallets or self-contained steel

units made up of decks and posts. Stacking frames are portable and enable the user to stack material several loads high. When not in use, the frames can be disassembled and stored in a minimum amount of space. Stacking frames are commonly used when loads are not stackable and when other racking alternatives are not justifiable. Also, because stacking frames can be leased, they are popular when there is a short term spike in inventory and the frames are needed to increase storage density in what is normally open floor space.

 Double deep pallet rack, consists of two single-deep racks placed one behind the other, and so pallets

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20 SKU can be stored in any lane at any level of the rack. To avoid double handling it is usual that each lane be filled with a single SKU, which means some pallets locations will be unoccupied whenever some SKU is present in an odd number of pallets. Another disadvantage of deep lanes is that slightly more work is required to store and retrieve product. However deep lanes have the advantage of requiring fewer aisles to access the pallets, which means that the warehouse can hold more product. A special truck is required to reach past the first pallet position.

 Drive-in or Drive-through rack, enables a lift truck to drive within the rack frame to access the interior

loads; but, to avoid double handling, all the levels of each lane must be devoted to a single SKU. With drive-in rack the put away and retrieval functions are performed from the same aisle, see Figure 4. With drive-through rack the pallets enter from one end of the lane and leave from the other, so that product can be removed accordingly to a policy of first-in-first-out (FIFO). Drive-in/through rack may be the same thought of as floor stacking for product that is not otherwise stackable. It does not enable the flexibility of access that other types of pallet rack achieve. In addition there are some concerns, for example: in this rack each pallet is supported only by the edges, which requires that the pallets be strong. In addition, it requires a more skilled forklift driver to navigate within the lane, and such a person will be more expensive most likely.

Figure 4 Drive in Rack

 Push-back racks, can be used as a replenishment reserve storage medium for pallet flow or carton flow

racks. The lift operator brings a new unit load to the location and pushes against the existing load until space is made to drop the new unit load. The push-back rack contains either pallet gravity-flow rails or a nesting carriage that rides on two rails. Push back applications are usually 2,3 or 4 loads deep. Some make deeper types, but the forklift may not be powerful enough to push these back. Maximizing the efficiency of this storage medium requires one SKU per location where FIFO, lot, and expiration control are not required. The WMS can use a FIFO window to help offset the LIFO disadvantage. In addition, the WMS must control the utilization of these locations to minimize honeycombing caused by partially filled storage containers that fill the locations. As with drive-through racks, the WMS must be able to allocate inventory at the location level to allow the operator to perform efficiently and not perform extra moves.

 Pallet flow through racks, in place of the horizontal load supporting beams in a conventional system,

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21 loads are loaded from one side of the rack and unloaded from the other side, thus providing first-in-first-out stock rotation. The conveyor tracks are often inclined at a slight angle to allow gravity to move the loads toward the output side of the rack system. Because of weight considerations, storage depths is usually limited to about eight pallets. This type of rack is appropriate for high throughput facilities.

 Mobile pallet racks, are essentially single-deep pallet racks on wheels or tracks permitting an entire

row of racks to move away from adjacent rack rows. The underlying principles is that aisles are only justified when they are being used; the rest of the time they are occupying valuable space. Access to a particular storage row is achieved by moving the adjacent row and creating an aisle in front of the desired row. Unfortunately, the pallet storage retrieval productivity is the lowest of any alternative. Mobile racks are justifiable when space is scarce and expensive, and for slow moving SKUs with one to three pallets on hand.

 Cantilever racks, which serve a similar function as pallet racks except the supporting horizontal beams

are cantilevered from the vertical central frame. Elimination of the vertical beams at the front of the frame provides unobstructed spans, which facilitates storage of long materials such as rods, bars, and pipes.

As mentioned earlier, an overview of all conventional storage equipment, with its advantages and disadvantages is given in the appendix, see Table 9.

4.1.3 Automated storage systems

An automated storage and retrieval system is defined as: A combination of equipment and controls which handles, stores and retrieves materials with precision, accuracy and speed under a defined degree of automation. There are currently two types of automated storage systems available, an automated storage and retrieval system and a carousel storage system. Both systems have different types which will be briefly explained and evaluated.

Unit load AS/RS, the unit load AS/RS is typically a large automated system designed to handle unit loads

stored on pallets or in other standard containers. The system is computer controlled, and the S/R machines are automated and designed to handle the unit load containers. The other systems described below represent variations of the unit load AS/RS.

Deep lane AS/RS, the deep-lane AS/RS is a high density unit load storage system that is appropriate when

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22 Figure 5 An automated deep bulk system

Mini load AS/RS, this is used to handle small loads that are contained in bins or drawers in the storage

system. The S/R machine is designed to retrieve the bin and deliver it to a P&D station at the end of the aisle, which is usually manned by a human operator. A mini load AS/RS is generally smaller than a unit load AS/RS and is often enclosed for security of the items stored.

Man-on-board AS/RS, this represents an alternative approach to the problem of retrieving individual items

from storage. In this system, a human operator rides on the carriage of the AS/RS machine. The man on board system permits individual items to be picked directly at their storage locations. This offers the opportunity to increase system throughput.

Carousel storage systems, these consist of a series of bins or baskets suspended from an overhead chain

conveyor that revolves around a long oval rail system

Storage Mediums Advantages Disadvantages Typical Applications

Automated storage systems

- High throughput rates - Facilitates use of computerized inventory control system - Facilitates interface to automated material handling systems

- High investment costs - Failure of machine means

no retrieval or storage of goods

- Higher maintenance costs - Different type of

employees needed to work with such a system

- Work-in-process storage - Final product warehousing and distribution center - Order picking - Kitting of parts for

electronic assembly

Deep lane AS/RS - FIFO stock rotation - Large amount of

same SKU Mini load AS/RS - High throughput of

smaller items

- Bins and drawers

Man on board AS/RS - Man on board for fast order picking

- High amount of order picking

Carousel - Relatively high

throughput

- Designed for bins and baskets

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23 4.2 Layout

Each storage location in a warehouse is assigned a unique address. This includes both fixed locations, such as a portion of a shelf and mobile locations such as the forks of a lift truck. Storage locations are expensive because they represent space, with consequent costs of rent, heating, security, and so on. In addition, storage locations are typically within specialized equipment, such as storage racks, which are capital costs. These costs impel to use storage space as efficient as possible.

4.2.1 Row depth and amount of aisles

As noted in §4.1.2, block stacking or floor stacking involves the storage of unit loads in stacks within storage rows. It is frequently used when large quantities of a few products are to be stored and the product is stackable to some reasonable height without load crushing. Frequently, unit loads are block stacked three high in rows that are 10 or more loads deep (Tompkins, White, Bozer, & Tanchoco, 2003). The practice of block stacking is prevalent for food, beverages, appliances and paper products, among others.

An important design question is how deep should the storage rows be. Block stacking is typically used to achieve a high space utilization at a low investment cost. Hence, it is often the case that storage rows are used with depths of 15, 20, 30, or more. During the storage and retrieval cycle of a product lot, vacancies occur in a storage row. To achieve first-in, first-out rotation, these vacant storage positions cannot be used for storage of other products or lots until all loads have been withdrawn from the row. The space losses resulting from unusable storage positions are referred as „honeycomb loss‟; block stacking suffers from both vertical and horizontal honeycomb loss.

The design of the block stacking storage system is characterized by; the depth of the storage row (x), the number of storage rows required for a given product lot (y), and the height of the stack (z), where the decision values, x, y, and z must be integer values. The maximum height of the stack is fixed and determined by the customer.

For a single product, factors that may influence the optimum row depth include lot size, load dimensions, aisle widths, row clearances, allowable stacking heights, storage/retrieval times, and storage/retrieval distribution. For multiple products, other decision variables must be considered. For example, the optimum number of unique row depths, the amount of row depths, the assignment of products to depths, and aggregate space requirements must be determined.

In appendix D an example is given about how to determine the optimal lane depth, the average number of storage rows required over the life of a storage lot and the average amount of floor space required.

The following formulas are used, as explained in appendix D: Optimal row depth, 𝑥𝐵𝑆𝑐 = 𝐴𝑄/2𝐿𝑧

Average amount of floor space required, 𝑆𝐵𝑆 = 𝑊 + 𝑐 𝑥𝐿 + 0,5𝐴 (𝑄 + 𝑥𝑧)/2𝑥𝑧

Average number of rows needed, 𝜂 = 𝑦 2𝑄 − 𝑥𝑦𝑧 + 𝑥𝑧 /2𝑄

EXAMPLE:

Suppose you have a batch of 200 (Q), the aisle is 3,00 meters wide (𝐴), the depth of a pallet is 1,00 meter(L) and has a width of 1,00 meter (W), you are allowed to stack it 4 high (𝑧), and you have a clearance between the lanes of 0,20 meter (c).

Substituting this in the formulas and solving for 𝑥𝐵𝑆𝑐 yields a value of 8,66. Therefore an approximation of

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24 𝑦 = 𝑄/𝑥𝑧 = 200 / 8,66 x 4 = 5,77, thus 6. This means you need 6 rows to store them in.

The average amount of floor space needed is: 𝑆𝐵𝑆𝑐 = 𝑊 + 𝑐 𝑥𝐿 + 0,5𝐴 (𝑄 + 𝑥𝑧)/2𝑥𝑧

𝑆𝐵𝑆𝑐 = (1,00 + 0,20)*(8,66*1,00 + 0,5*3,00)*(200+8,66*4)/2*8,66*4 = (1,2)*(10,16)*(234,64)/69,28 =

41,29 m2

This example however assumes a constant flow out of products during a time period. It does not help to find the appropriate depth when different amounts of pallets are shipped. However it helps to give insight in the amount and depths of storing rows.

4.3 Warehouse operation

In this part a number of possible improvement areas are introduced which can help to improve the overall performance on a tactical level. The operation strategy selection problem is to determine how the warehouse is going to be operated, for example, with regards to storage and order picking. Here operation strategies refer to those decisions that have global effects on other design decisions, and therefore need to be considered in the design phase.

When product is stored in convenient locations, then it is easy to retrieve when requested by a customer. But what is meant by „convenience‟ depends on models of labor and space. These models are simplest for pallets, because they have some fairly uniform dimensions and special requirements for handling and storage (Bartholdi & Hackman, 2008). There are two main strategies, dedicated and shared storing. In the following paragraphs both strategies will be explained. A class based dedicated strategy will also be discussed.

4.3.1 Dedicated storage

With dedicated storage or also called „fixed location storage‟, each individual „stock keeping unit‟ (SKU) is stored in a specific location, and no other SKU may be stored there, even though the location may be empty. This means that locations are reserved for all SKU‟s stored in the system, and so the number of storage locations for each SKU must be sufficient to accommodate its maximum inventory level. The basis for specifying the storage location is usually one of the following: (1) items are stored in part number or product number sequence; (2) items are stored according activity level, the more active SKUs being located closer to input/output station(s); or (3) items are stored according to their activity-to-space ratios, the higher the ratios being located closer to the input/output station.

4.3.2 Shared storage

Shared storage, also called „random location storage‟ means that each worker is allowed to store goods on each vacant position. Each product can be stored in every storage row and multiple products can be stored in a single row. This means that honeycomb loss is reduced. But it makes handling of the items very problematic. Other items need to be retrieved in order to retrieve the right unit load. Multiple items stored in a single row makes it hard to find products. Damages are likely to occur, due to the extra movement of SKU‟s.

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4.3.3 Class based dedicated storage

Some of the advantages of both strategies can be obtained in a class based dedicated storage allocation, in which the storage system is divided into several classes according to activity level, and a randomized storage strategy is used in each class.

It uses the dedicated storage strategy to assign products to different classes. Each class is assigned an area inside the warehouse. In such a class, randomized storage can be used. This combines the advantages of requiring less dedicated storage locations, but still reduces the average travel time for an item.

4.3.4 Single and dual command cycles

In single-command operations, workers travel from a pickup and deposit (P&D) point to a single location in the warehouse, where they store or retrieve a single pallet before returning (Pohl, et al. 2008). One half of their travel is unloaded, and therefore unproductive.

A second protocol is to interleave storage and retrieval operations to form a dual-command cycle, in which workers perform a storage operation and then continue directly to a retrieval location before returning to the P&D point. Interleaving reduces the empty forklift travel from half of the total travel distance to about one third. The travel distance between the storage and retrieval locations is referred as „„travel-between”. 4.4 Conclusions

In this review of the literature multiple areas where improvement can be made have been discussed. These areas can be divided into three parts; the choice for an appropriate storage medium, the lay-out of the facility and the operating strategy.

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26 5 Current Situation

In this chapter the current situation is discussed. The basic requirements in warehouse operations are to receive goods from suppliers, store the goods, receive orders from customers, retrieve goods and assemble them for shipment, and ship the completed orders to customers. Each of these steps are elaborated and evaluated in the current situation. The information is split up into a qualitative part, where the quality of the processes are discussed and a quantitative part, where a financial overview of the situation has been given. Further the added excel file contains all the calculations, and financial information that has been used.

Qualitative information

5.1 Receiving and clearing of products

When the products arrive they are received, checked for failures and scanned. The goods are always stored at a buffer location (fast pick area or „zetveld‟) in order to absorb peak occupancy. Products are stored per customer in different warehouses. In the warehouse itself they are sorted per type of product, for example the pallets with sacks are stored together, and carton boxes are stored somewhere else. Most of the warehouses store the goods on the ground and block stack them, except for warehouse E and G, there they have a single deep pallet rack system.

The average amount of products which arrive at warehouse AB for example, are orders which contain either 20 pallets of sacks or 26 pallets of boxes. This is a full trailer and this method of transportation is referred as conventional transportation. The size of an order can change and can be different for each warehouse. More than 95% of the goods that arrive are transported conventionally. The other incoming products arrive per train in containers, which is not common. The receiving and clearing up times of the products are therefore well known. The norm times are depending on the type of product (boxes, sacks or big bags), the warehouse it is stored in (due to different sizes of the warehouse) and the availability of the loading docks. Almost all products arrive on pallets. It takes about 30 min. to receive an order and store them temporarily on the fast picking area. The clearing up of products towards there storage location takes for an order of sacks about 30 min. in warehouse AB but for pallets with boxes about 45-60 min. This is because pallets with boxes are only allowed to be transport individually, where pallets with sacks usually can be transported two at a time.

5.2 Storage of products

All the goods are transported inside the warehouse by electric forklift. The routing of the transportation is not predetermined. Every electric forklift driver decides on experience and common sense how to store and pick the goods. They store the products randomly, when it is busy, they store the product in the nearest open location available, when they have more time, they store the goods randomly at the furthest open location possible. Each lift truck driver is assigned to one order, which contains usually 20-26 pallets. They either load or unload the container/trailer, or they are busy with order picking or cleaning up of the „zetveld‟ areas.

In warehouses ABCD products are stored in multiple lanes, with different depths. About 70% of the lanes contain products with multiple product numbers. In warehouse F this is about 40% and in warehouse H this is 20% according to the warehouse managers. The amount of pallets they need to pick to get to the right pallet when products are demanded and need to be picked lie on average between 4 and 10 pallets. This has to do with the disperse of products in the storage rows.

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27 before they are transported, and they also scan the location where they stored it. Not all warehouse locations are equipped with a scanning system. Similar products, with the same product number are stored in a single warehouse. Products are ordered by customers and every customer has it is own specific demands. Most customers are in direct contact with the customer service, which prepare the orders and plan the transportation. However there are certain customers (like AVEBE and Koopman) which are in direct contact with the warehouse.

Every day a planning of personnel and a schedule for transportation is made. This is based on the norm times for the handling activities and based on experience. For the customer service it is difficult to get an insight in the situation from customers that are in direct contact with the warehouse.

5.3 Order picking and shipping

The shipping of goods takes place by train in containers and by taut liners in trailers. The customer service department (CS) gets an order from their customers. The customer demands a certain amount of products, which are currently stored somewhere in the warehouse. Each customer has different demands and the customer service department tries to fulfill them as much as possible.

The customer service department assigns which pallets/ big bags should be loaded on a container/trailer. The products are mainly FIFO ordered, unless the customer requires different. The assigning of locations of the trailer/ container at the docks is randomly, based on which dock is available. When products are ordered for transportation they are fitted into a schedule. There are different time slots for orders to be order picked and made ready for transportation. The orders (AO‟s ) are order picked and put on the fast picking area. There are three methods of transportation used.

The first is conventional transportation, whole pallets are transported per trailer. This takes about 60-75 min. for an order with boxes (26 pallets) and can take about 60 to 120 min. for an order with sacks (20 pallets). This large difference is caused by the difference in order methodology. If an order is FIFO ordered and can be picked from a single row it takes about 60 minutes. However if a customer wants to have individual pallets and they need to be picked from different rows and a large amount of pallets need to be moved to get to the right pallet it can take more than two/three hours to fulfill an order.

The second is transportation of full pallets per container. These so called „drive-in‟ container orders contain about 12 pallets in a 20 foot container and 24 pallets in a 40 foot container. A 20 foot container takes about 30-45 min. and a 40 foot container takes 60-75 min.

The third method of transportation are containers which are filled by hand. This is used to load containers with a higher density. It takes two men 8 hours to fill 6-7 20 foot containers (12 pallets). This means it takes about 12 min. per pallet to load by hand.

The transportation of big bags takes place in warehouse C/D and E. In warehouse E it takes about 80 min. to receive and clear away all pallets (22 big bags) per order. Warehouse E has a somewhat oblong shape. This means that large distances have to be traveled in comparison with warehouse C for example.

5.4 Value added Logistics

The company also provides Value added Logistics (VAL), for example:

 Quality control, quality checks of goods before they are sold and distributed.

 Packing or repacking, some goods need to be repacked and sealed on pallets, or the amount of goods on a pallet needs to be changed.

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 Bulking and de-bulking of the goods. Bulking stands for the filling of big bags and the filling from big bags to bulk trailer. With de-bulking it‟s the other way around, from bulk trailers to big bags and from big bags to 25 kg sacks.

5.5 Quality of personnel

Due to the fact that the warehousing of DVTG is largely a „public third party logistical‟ (3PL) warehouse it has to cope with large fluctuations in demand. When customers want to store or order products it is often not know how long products will stay in the warehouse or when they are ordered for shipping.

This has a big effect on the amount of personnel which are working on the work floor. Currently a reasonable amount of flexible non permanent workers are hired. However, due to the large fluctuations in demand, training and educating of this personnel is not profitable. Therefore a big difference exists in the quality of this personnel.

When the fluctuations can be limited, extra training and education will be more profitable. This fluctuation can be limited by job-enlargement for example. A better quality of personnel is necessary when the performance of the warehousing wants to improve. Continuous improvement of the lay-out for example, can only be achieved by involving personnel and creating a culture where improvement is stimulated.

Quantitative information

In this part of this report an analysis of the financial situation of the warehousing is given. A global analysis for all warehouses has been made to provide further insight in the performance of the warehouses. A number of conclusions can be drawn from this data.

5.6 Financial overview

An overview of the financial situation in 2008 is presented here. Based on this data some elements are elaborated and further explained.

In Appendix E you can see the financial overview of 2008. Most of the costs are direct costs. However to be able to calculate the unit costs of handling activities, value added logistics or storage of products you need to redefine the (in)direct costs.

Direct costs can be defined as: A cost of a resource or activity that is acquired for or used by a single cost object. A cost object is something for which a cost is computed. Example of cost objects are: a product, a product line, a department, or a division.

Indirect costs are defined as: The costs of a resource that organizations acquire to be used by more than one cost object.

Improving the operating performance for the warehousing of De Vries Transport Group