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PARCEL

FEBRUARY 2012

www.PARCELindustry.com

WAREHOUSE OPTIMIZATION: LET’S GET EFFICIENT page 14

Is a WMS right for your operation? page 18 Could mobile-powered workstations be the answer to your warehousing roadblocks? page 22 Confused by the carriers’ rolling averages? Not anymore. page 24


FEBRUARY 2012 | volume 19 | issue 1

PARCEL PUBLISHER Marll Thiede EDITOR Amanda Armendariz amanda.c@rbpub.com

DEPARTMENTS

CIRCULATION Rachel Spahr | rachel@rbpub.com PRODUCTION DIRECTOR Chad Griepentrog

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Going Global

Classifying Products According to the Harmonized System BY TOM STANTON

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Transportation ABCs Why a Third Party? BY TIM BROCK

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Parcel Perspectives

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GRAPHIC DESIGN Kelli Cooke

Recalculating BY ROB SHIRLEY

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ADVERTISING Ken Waddell | ken.w@rbpub.com Josh Vogt | josh@rbpub.com

Packaging

Fundamentals of Packaging BY BRENDA JACKSON

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Going Mobile BY PETER STARVASKI

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Supply Chain Pivot

Supply Chain Management

Selecting Your Logistics Providers – Pros and Cons BY SAM KARAM

Regional Alternatives

2901 International Lane Madison WI 53704-3128 608-241-8777 • Fax 608-241-8666 www.PARCELindustry.com

Parcel Spend Invoice Shock BY MARK MAGILL

FEATURES 14

A Roadmap to Warehouse Organization and Optimization

If organizing your warehouse is on your list of New Year’s resolutions, here are some key considerations. BY SUSAN RIDER

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Inventory Nightmares – The Case of the Vanishing Business Assets

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Is a Warehouse Management System Right For Your Business? Before making such a big decision, it’s wise to take these factors into account. BY CURT BARRY

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Optimize Scanning & Labeling the Wireless Way

Mobile powered workstations can drastically reduce employees’ footsteps through the warehouse — and productivity soars in the process. BY CHRISTINE WHEELER

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Understanding Rolling Averages Used by Parcel Carriers

Your invoice is a key component in managing your transportation spend—but many don’t understand it in its entirety. BY CARL HUTCHINSON

EXTRAS 05

Editor’s Note

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PARCEL Counsel

Safety Ratings & Safety Measurement System (SMS): A Critical Distinctions BY BRENT WM. PRIMUS, J

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Wrap Up

Going Virtual — Are You Ready? BY MICHAEL J. RYAN

REPRINTS For high-quality reprints, please contact our exclusive reprint provider. Scoop Reprint Source • 800.767.3263 ext. 144 www.scoopreprintsource.com PARCEL (ISSN 1081-4035) is published 6 times a year by RB Publishing Inc. All material in this magazine is copyrighted 2012 © by RB Publishing Inc. All rights reserved. Nothing may be reproduced in whole or in part without written permission from the publisher. Any correspondence sent to PARCEL, RB Publishing Inc. or its staff becomes the property of RB Publishing, Inc. The articles in this magazine represent the views of the authors and not those of RB Publishing Inc. or PARCEL. RB Publishing Inc. and/or PARCEL expressly disclaim any liability for the products or services sold or otherwise endorsed by advertisers or authors included in this magazine. SUBSCRIPTIONS Free to qualified recipients: $12 per year to all others in the United States. Subscription rate for Canada or Mexico is $35 for one year and for elsewhere outside of the United States is $55. Back-issue rate is $5. Send subscriptions or change of address to: PARCEL, P.O. Box 259098 Madison WI 53725-9098 Allow six weeks for new subscriptions or address changes.

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EDITOR’S NOTE AMANDA ARMENDARIZ

Optimization: Full Speed Ahead One of the things I like best about being the editor of PARCEL is that our readers are so engaged with us. I frequently receive emails and phone calls from our subscribers, suggesting a topic or area of interest that we should cover. And that’s exactly what happened with this issue. Last year, we had several subscribers say that while most of our subject matter was spot-on, one thing we needed to focus on a bit more was warehousing. We at PARCEL hate to disappoint our readers, so here it is; our first issue of 2012 is focused on many aspects of warehouse optimization. If streamlining your warehouse and increasing efficiency and productivity was on your New Year’s resolution list (along with working out five times a week and limiting the sweets, of course), then this issue is for you. Of course, if managing the warehousing isn’t on your list of required job duties, never fear. There is still plenty of insight to be gleaned from these pages. After all, many of the factors to take into consideration in order to increase the productivity of the warehousing operation could easily be modified and applied to almost any step of the supply chain. The supply chain world continues to grow at a rapid rate, so staying on top of these changes and adapting to them is crucial. And, I know it seems early in the year to be thinking about this, but one of the best ways to stay on top of every aspect of the supply chain is by attending our PARCEL Forum in Chicago. Preparations for this year’s forum, held October 23-25 at the Hyatt Regency O’Hare, are already in full swing, so mark the date. After all, if success in the supply chain is one of the things you want to accomplish (or maintain) in 2012, it makes sense to use every resource possible! As always, thanks for reading PARCEL.

FEBRUARY 2012 | www.PARCELindustry.com

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Going Global with Tom

Stanton

Classifying Products According to the Harmonized System In my last article on exporting, I said I would go into some more depth this time. I recently began working on a harmonized system database classification project for a client, and I thought it might be helpful to explain some essential import and export basics about the Harmonized System. The following paragraphs discuss the worldwide use of the system, the two US names for the system, a starting point, NAFTA and destination classification variances.

Worldwide System: The Harmonized System of classification as used worldwide has a basic set of six digits defined as the chapter (first 2), heading (first 4), and sub heading (first 6). The Harmonized Tariff Schedule of the US (HTSUS) adds four digits to help further define commodities for the purposes of import and export statistics and duty rates. For example, 3926.90.5600, plastic machinery v belts of predominantly vegetable textile fibers, is assigned 5.1% duty for US imports, but 3926.90.5700, plastic machinery v belts of predominantly man-made fibers, receives a 6.5% duty for imports into the United States.

defining which items are covered by a particular classification and which items are not. A Schedule B search engine (http://www.census.gov/foreign-trade/schedules/b/) is also provided by the US Department of Census. I personally find the US Customs CROSS database search engine (http://rulings.cbp.gov) helpful because the system will search for a particular word and then list any US Customs rulings where the word appears. Since Customs rulings usually provide a background or frame of reference, these documents provide helpful information to identify the appropriate subheading of the US tariff schedules. For example, searching for plastic machinery belts in the CROSS search engine identifies US Customs and Border Protection ruling NY859598, which suggests 3926.90 for plastic machinery belts. I also recommend the product Customs Info, which has an even more extensive database of searchable customs rulings (http://www.customsinfo.com/).

NAFTA: In order to claim duty free status under NAFTA when

exporting from the US to Canada or Mexico, the six-digit harmonized number and a NAFTA certificate of origin are required. Two Names: Exports from the United States valued over In the Canadian tariff, plastic machinery belts of predomi$2,500 per line require the harmonized classification num- nantly textile fibers are classified as 3926.90.9110 and are ber for export statistics. In the US export regulations, the har- free of duty under their general tariff rate. In this case, items monized classification numbers are listed as “schedule B.” under this classification are duty free with or without a NAFTA Schedule B numbers vary a little from the HTSUS because certificate of origin. we do not need to make as detailed distinctions between classifications for export purposes. For example, the sched- Destination Classification Variances: Though ule B classification of plastic belts of textile fabric only offers efforts have been made to standardize and simplify clas3926.90.5500 — v belts and 3926.90.5800 — other plas- sification of products and components, the United States tic belts. However, heavy imports of a certain product can shut Service and Border Protection takes a very restrictive role down a functioning US business. Detailed data of what specific of classification. The US and Canadian harmonized rules imports are causing the problem to a US business are some- state that any component of a product that is specifically times needed for tariff rate applications. named in the tariff must be entered under the named provision. Therefore, machine screws imported as replaceA Starting Point: So how does someone come up with a ment parts for a particular product must be classified as number for classification? The Harmonized Tariff Schedule machine screws unless you can define that these screws are of the United States (http://www.usitc.gov/tata/hts/ ) pro- only applicable to a particular machine due to their size and vides an index in the back of the book and chapter notes shape. However, many countries accept component parts as

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february 2012 | www.PARCELindustry.com


classifiable as component parts, so it may behoove the shipper to contact the broker in the foreign country to ensure the least duty impact classifications are being used within local interpretation of import laws.

Conclusions: The harmonized system is a worldwide system of product classification utilized to assist in streamlining imports and exports and data collection for trade negotiations. In the US the system has two names, HTSUS for import and Schedule B. There are a number of ways to identify a classification for a product. Use of the CROSS database search

engine is offered as an efficient starting point. NAFTA uses the first six digits of the harmonized system on certificates of origin. Exporters and importers are advised to check with the destination customs broker to see if there are any unique local interpretations of the law that should be considered for import classifications.

Thomas M. Stanton, AFMS International Analyst, can be reached at tom.stanton@afms.com.

february 2012 | www.PARCELindustry.com

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TRANSPORTATION ABCs with By

Tim Brock

Why A Third Party? If you’ve ever used a travel pricing website to plan your vacation, used a realtor to buy a house, or called 1-800-GOFEDEX, then you know the routine. Priceline.com, Century 21, Convergys — none are specifically contracted to you, but all are in place to facilitate what one party or the other is trying to accomplish. And when what you’re trying to accomplish is small parcel savings for your company, let’s face it, most companies don’t have the time nor the resources to dissect immensely complex parcel agreements and obtain information pertaining to the rates that are available in today’s market. But in the unique industry of small parcel transportation, where few competitors exist, discussions involving processes and cost reduction must be looked at on a completely different level. With UPS and FedEx being the only true current primary players surrounding this industry, the competitive advantage weighs heavily on their side. How many other companies, within any market, can implement annual rate increases that have such enormous negative impacts on the vast majority of their customers? In a business sense, the concept is great – two “suppliers” with eerily similar pricing structures and services bidding on one company’s shipping revenue. Too bad that concept isn’t great for your business. Anyone can pick up the phone and call his or her respective carrier account manager and ask for better pricing, the same way any of us can call each of the dozens of airlines and compare rates. Even when the pool of competitors is two, you generally can receive a token discount. You might even hear how important your account is and how difficult it was for that account manager to even secure those additional savings. But the bottom line is that you can never know for sure whether the incentives you’ve negotiated are as good as they could have been. This is the basis of the true need for utilization of a 3PN. Here are three reasons why any client will benefit from involving an outside party:

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The expert attention to detail that a reputable 3PN can provide to the client will ultimately be the driving factor to securing the overall cost savings at the end of the process. Every possible element of a client’s shipping process must be reviewed and understood, from order taking to final delivery.

Expertise Let’s say you ship, oh, I don’t know, scented candles. You probably know the ins and outs of every type of every candle your company sells, right down to the gauge of the wick. If I’m looking for a candle that burns brighter, lasts longer, and smells better than all the rest, I’m coming to you. I could always walk down aisle seven at the local supermarket for a 15-minute sniffing spree, but once I make a purchase, who’s to say I won’t be the one getting burned? They certainly aren’t going to tell me on the label! Why should shipping be any different?

Knowledge Like many aspects of modern business, trans-

Strategy Maybe you’ve spent your entire career in logistics. Hey, maybe you’ve spent the whole time with the same company. You know what makes each carrier tick, as well as everything there is to know about DIM weights and zone 2, 1-pound minimums. Chances are, you’ve negotiated more than one contract in your day. But how can you be sure that they wouldn’t have tacked on a percent here or there if you were only sure where to ask for it? As a third party negotiator, I have seen customers that can confidently check all three to the affirmative. But for each of those, there are dozens that cannot, and their companies lose money every day — without ever even knowing it — as a result. Either scenario usually involves an exceptionally qualified, extremely intelligent individual or team. They simply specialize in other areas. The reality is that, as with just about everything, if you want to be sure, it helps to have an expert. And whether you uncover savings you’ve never seen before, or confirm the great rates you knew you had all along, you’ll come away with a value-add that is hard to put a price tag on — peace of mind. p

portation is ever-changing. Staying on top of service changes, rate increases, surcharge modifications and adjustments, as well as operational changes and/or improvements that carriers routinely make, is a full-time job.

tim BroCk, Director of Sales, Transportation Impact can be reached at 910.297. 5787, tbrock@transportationimpact.com or www.transportationimpact.com.

february 2012 | www.PARCELindustry.com


Parcel PersPectives with  Peter

Starvaski

Going Mobile One of the hot trends is being able to provide your software is running, with an alert if the other server did have an issue, or a component of your software as an ‘app’ on a mobile could facilitate a quick response to mitigate down-time. device. All of the carriers have them now (I really like the Most shipping systems also have a data element that new USPS app. If you have not checked it out, you should; shows a package or a shipments status. This can include slick graphics and not a lot of tabbing, so it’s easy to navi- ‘voids’ as well as a status indicating some exception has gate with a built in barcode reader). But when I think of par- occurred. A high number of exceptions or voids, or at least cel shippers and the readers of this magazine, I do not think some sign showing that these were trending upwards, would that a mobile app for our industry segment needs to let you be another good indicator for a warehouse manager to invesship a package, find a location to drop off a shipment or, tigate and curtail what might not be noticed until much later quite frankly, do most of what the carrier apps today pro- in the day. vide for functionality. They provide value for us as we go These are just a few ideas I’ve been tossing around with about our lives outside of work but add little value in the some of my peers as we discuss what type of mobile app warehouse. I don’t see (in the short-term anyway) warehouse would have value in the warehouse. I think these types of employees using their phones to go through the warehouse operational indicators/alerts on an app would be cool and shipping packages (and I could very well be eating those offer more value than what we are seeing for apps in this words in a year or two). space today. However, what if we were to give the manager of the wareSo, cool app builders take note: The real value of a parcel house operation some simple ways to monitor some opera- shipping app might not be in the ability to actually ship a partional efficiency? For instance, data elements such as the cel, but the ability to keep on shipping, efficiently. p average time to process a shipment would certainly be useful. Modern shipping software platforms should also be able to provide the quantity of shipments processed by a particu- Peter starvaski  has over 10 years in the parcel shipping industry and is lar user or at a particular bay/trailer. These indicators could a recognized industry expert in parcel shipping, having authored numerous be on a dashboard display that changes colors at a prede- articles and whitepapers. He  is currently Director, Product Management for termined level to let a warehouse manager quickly view the Kewill’s Shipping Products.  current state of their operation. If a particular area of the warehouse was slowing down, an alert could notify the manager who might be able to proactively address the root cause before the situation got out of hand. Most high-speed operations also have a variety of integrations to the shipping software. It is often other server(s) that the shipping software is communicating with on a transaction by transaction basis. An indicator showing the integrity of the network connectivity and/or that the other application

february 2012 | www.PARCELindustry.com

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REGIONAL ALTERNATIVES with Mark

Magill

Parcel Spend Invoice Shock In this volatile economy, increased parcel shipping costs have been steadily eating into the bottom line of highvolume shippers (just take a look at your newest postrate increase parcel invoice). In the latest revenue reports released by the national carriers, their domestic package volumes have been flat or sluggish at best, but their profit margins have skyrocketed. This is no doubt because they are focusing on yield-management exercises or, in plain English: higher shipping rates. The good news is that there are cost reducing alternatives that can be used to enhance or even replace the national carriers in large swaths of the US delivery market. Regional carriers deliver to large geographical areas in multiple states through an interconnected hub and spoke model. They deliver to Zones 2 through 4 and offer next-day ground delivery to destinations more than 600 miles from their origin. It is important to note that more than two-thirds of parcel shipments stay within that regional footprint. Because they are very capital intensive enterprises, there are only a handful of them located across the US, but they deliver to 40 of the lower 48 states and serve well over 200 million consumers. A Brief History of the National Carrier Rate Increases Five short years ago (2007), the Absolute Minimum Charge (the Zone 2, one-pound Ground rate) for the national carriers was $4.00. Now in 2012, it has crept up to $5.49. This is an increase of more than 35%. Thankfully, the rate of inflation has not risen anywhere near that much! In addition to the increase in the base package charge, there have been a host of accessorial charge increases including, but not limited to, Residential Delivery, Delivery Area Surcharge and Extended Delivery Area Surcharge. To make matters worse, in last year’s General Rate Increase, the volumetric factor used to calculate dimensional weight charges was changed from 194 to 166 for domestic shipments. If your company ships large boxes (20” x 20” x 20” for example) your dimensional weight charge increased by 17%! Many large shippers with aggressive national carrier contracts thought they dodged a bullet when they did not receive the change in the DIM factor last year. However, many of these grandfathered exemptions are expiring in 2012. 10

february 2012 | www.PARCELindustry.com

Cost-Reducing Strategies with Regional Parcel Carriers One of the quickest ways to reduce your shipping spend is to change your shipping mode from a national carrier Express service to a regional carrier Ground service. This is because regional parcel carriers provide guaranteed next-day delivery at ground rates to Zone 4 destinations. The national carrier’s Ground services will only deliver shipments next day in Zone 2 and part of Zone 3 (see the UPS and FedEx Ground time-in-transit maps for details).

LET’S Look AT AN ExAMpLE If a customer expects next-day delivery and they’re more than 300 miles away, you’ll need an Express service. But those express rates cost substantially more than Ground services. For example, a one-pound Zone 4 FedEx Standard or UPS Next Day Air Saver package costs more than $33.00. A person may rightly respond, “I get a great express discount from my carrier.” However, if they converted that same Zone 4 shipment to a regional carrier’s guaranteed next-day Ground service (a shipment from Philadelphia to Boston), they would pay only $5.94. So, even if a shipper had a 50% discount with the national carriers ($16.50), a regional parcel carrier would reduce the discounted price by over 60%!

Depending on your volume and package level detail, regional parcel carriers can also give you more heavily discounted base rates for Zones 2 and 3. You’ll typically see a net spend reduction of 15 to 20% with the switch. Regional carriers can also save you money with fewer (and less expensive) accessorial fees. Regional parcel carriers are able to provide this reduced shipping spend because they do not need to support a worldwide infrastructure that includes fleets of cargo jets. And, most importantly, any monies saved by reducing your shipping costs go straight to your bottom line. p

MARk MAgILL  is Director of Business Development, OnTrac. Visit www.ontrac.com for more information.


Supply Chain Pivot with Rob

Shirley

Recalculating As we move towards the speed of thought becoming the delivery metric, it is worth reflecting on how we got here, what the customer is looking for and what skills are required to excel. Before we begin, it is important to realize that most people you will ever meet will believe that they could easily do this difficult job well and, therefore, you should be great at it. Skill sets oscillate from the person who just started on the dock to someone with decades of experience and advanced degrees. A very short summary: the wheel was invented in Iraq in 3500 BC, Christopher Columbus discovered America, Isaac Newton observed gravity, William Waddell founded Pony Express, Alexander Bell invented the phone, the Wright Brothers invented the airplane, Henry Ford mass-produced the first vehicles, Albert Einstein explained that energy and matter are different forms of the same thing, and Frederick Smith started FedEx. When a customer calls you to ask why their package wasn’t delivered from Taiwan to Tupelo on time, your answer needs to be explained more easily than, but just as quickly as, E=mc2 because the customer is in a hurry. It is estimated that a total spend of $3.5 trillion a year is made on transportation, warehousing, inventory obsolescence, customer service, and associated costs to power the global supply chain. This is what capitalism and free enterprise are all about on a hyper-competitive worldwide scale With that much money involved, you can imagine how much is at stake. Your challenge as vP, Director or Manager is pivotal: 1. Institute superb employee recruiting to find, get and keep the best talent – balance between full time, part time and temps. 2. Formalize training and leadership with all employees and independent contractors. 3. Keep costs competitive and profitable for products, services, solutions, labor, technology, and real estate. 4. Have as few suppliers as possible, but beware of natural calamities because they are sometimes not recoverable. 5. Always have inventory accessible. 6. Create and maintain vendor relations and outsourcing at a high level. 7. Provide packaging: a. That weather, trucks, and handlers can’t harm b. That is green and reusable c. That is easy for the final customer to open

8. Offer money back guarantees and free returns 9. Think local and act global 10. Have great customer service that upsells orders without being a nuisance. 11. Select your transportation modes to balance order cycle with costs and customer satisfaction. 12. You can’t manage what you don’t measure — create metrics that drive performance on everything. To accomplish this mission, you will need a wide array of skills that include: Analysis, Arbitration, Geography, Global Strategy, Leadership, Logistics, Marketing, Negotiation, Process, Purchasing, Supply Chain Management, and Technology. Some schools with great curriculums for these skills are MIT, Michigan State, U of Penn, Carnegie Mellon, Penn State, Arizona State, Ohio State, Stanford, Northwestern, U of Tennessee, Thunderbird, and Georgia Tech.

looking foR SuPPlY Chain PRofeSSionalS? Great people are the bedrock key to your success. The Council of Supply Chain Management Professionals has a good recruiting site. Visit CSCMP.org for more information.

You may remember that I previously wrote the Regional Alternatives column, so where did I come up with this new name? Well, Supply Chain Pivot was coined because a pivot is: any person upon whom something or someone functions or depends on vitally. It seemed fitting for this subject matter. We invite you to use this column to teach, challenge and explore the intricacies of the journey ahead. Feel free to recommend who, what, why or where you want to hear about. p

Rob ShiRleY is president of ExpresShip, inc. a strategic partner in the global supply chain. Email him at rsxpship@gmail.com. february 2012 | www.PARCELindustry.com

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PACKAGING with Brenda

Jackson

Fundamentals of Packaging The company for which I work does not really have any special shipping needs. We do not ship anything that is temperature-sensitive; hazmat materials rarely enter the equation; and we don’t ship a lot of heavy freight. What we do ship is tons of paper, paper, and more paper that contain the lives of our customers. Protection of the names, addresses, and Social Security Numbers are paramount. Unfortunately, not all 100,000+ employees at my company understand packaging; fewer still consider the processes it takes for a package to arrive from Point A to Point B. Without proper packaging, the probability of unintentional exposure of this data increases. What are the three things I want to say to each of my customers that call with a problem? Use your common sense; package materials as you would package a cherished family heirloom; and realize that your package is subjected to how well everyone else packs their box. After having them think about that advice, I then want to take them on a tour of the closest small package shipping center. I want them to see the handling that packages receive and the complex systems that are used to ensure routing of the package is correct for a timely delivery. Let them spend five minutes in the middle of conveyer belts going multiple directions, watch packages go down a slide and observe the unloading and loading of packages. If this could be done for every one of my customers, just once, then user-created shipping problems would just about vanish. Since I cannot be quite that forthright, here are the top five questions I seem to answer repeatedly:

1. I am just shipping paper. Why do I need to cushion paper? The purpose of using peanuts, crumbled newspaper, air packs, etc., is to prevent excess movement within the package. The less the contents shift within the package, the less likely it is that damage will occur. A five-pound ream of copy paper can destroy a box just from moving around inside it. Has anyone ever seen the flippers that fling the package off the table into a bag? I can just picture a package coming open at just the right time. It would look like a paper storm.

2. Why can’t I use a copy paper box for packaging? Those are the only boxes I can scavenge. Only use corrugated boxes with flapped lids for shipping. Using a box with an actual “lid” increases the likelihood that the lid will get hung in conveyor 12

february 2012 | www.PARCELindustry.com

belts, chutes, or other sorting equipment. It is the responsibility of the office to have adequate shipping supplies, just as it is the office’s responsibility to have pens and pencils. Need money? That is a management problem. Go see Mark Taylor’s article in previous issues of PARCEL for advice.

3. I am reshipping in the original manufacturer’s box. Why was the product damaged? Not all manufacturer boxes are designed for shipment through a small package carrier. Many manufacturers design the boxes and cushioning for freight shipping, which incurs much less handling. Do not assume that because it got to you in one piece that it will get to the next place in the same condition. As a rule, do not utilize more than 75% of the recommended Box Maker’s Certificate (BMC) when shipping with a small package carrier. If unable to find a BMC, don’t ship it via small package ground carrier.

4. I shipped two items and the recipient only received one of the items in a severely damaged box. Didn’t someone see the item come out of the box? Why couldn’t they have just put the item back in the box? This is the question where I have to take a deep breath and explain: “Your package is not hand walked through the facility nor does someone maintain eye contact with your package at all times.” A package going across the country will be unloaded, placed on conveyer belts, sorted, placed on more conveyer belts, shoved down chutes and placed in a bag with other packages. Kid gloves do not exist in small package shipping.

5. I know this package is only going 150 miles, but I want it to go by plane. It MUST go air! Just because you want it to go by air service does not mean it will. Let’s see, the small package carrier has 12 hours to move the package 150 miles. Fly it or drive it? What would YOU do? Yes, education is the key to most of these questions. We do have opportunities to provide education, but packaging always seems to take a back burner to the “real work.” At least until the next shipping fire… p

BrenDA JACKSon eMCM is a Senior Distribution Specialist with the Internal Revenue Service. She has attended and taught at numerous PARCEL Forums, serves on the PARCEL Forum advisory committee, and has negotiated small package shipping contracts for the Treasury Bureau.


Supply Chain Management with Sam

Karam

Selecting Your Logistics Providers – Pros and Cons The logistics market is saturated with hundreds of companies; so many a logistics professional has pondered this question: “How can I select the right provider? Equally important, do they all provide the same services?”

Before answering the above questions, let us examine the concept closely. Logistics providers are: • Major Companies – Companies that own a fleet of cargo aircrafts, ground trucks and thousands of employees worldwide or simply own steamship liners for ocean freight worldwide. • Freight Forwarders – Companies that own ground fleet and contract with major companies to utilize their Air Fleet and or Ocean fleet. • Consultants – Non-asset brokers who can be hired to negotiate on behalf of the customer.

Pros: The freight forwarder will provide a personalized service that can not be offered by major companies. Cons: The freight forwarder does not control the freight beyond his warehouse. The Solution: • Identify the experts in their field of specialty. Remember, no

one provider is an expert in everything logistics. • Provide your business needs and request a customized solu-

tion for each segment of your business. Do not fall for the total solution provider. • Do not fall for the earned discount deal; it is not what it is pre-

sented to be. It is a tool that the provider uses to secure revenue and margins no matter how slow or steady your business is. • Award your business segments to the experts that can pro-

vide the following: 1. Best service complemented by the proactive notification

of timely information. 2. Local dedicated customer service representative to un-

Many companies elect to utilize the annual RFQ or RFP (request for quotation or request for pricing) as a method to select a logistics provider. Others will hire a consultant to take over that process. Pros: The RFQ/RFP is used primarily to receive the lowest cost of transportation. Cons: Customers will learn that more often than not, they awarded the contract to the wrong provider or they will not reduce their cost as they were led to believe. Meanwhile, other companies will elect to utilize a freight forwarder to handle their supply chain.

derstand your business and operational needs. 3. Competitive pricing structure.

Reducing cost of your supply chain is a major task; however, no savings will compensate for a wasted manpower during a shutdown situation or a lost bid that your samples never made it to. Always remember, logistics agreements are not contracts; there is no penalty to hold you hostage to that agreement. You are the boss, so select wisely.  p

Sam Karam is Branch Manager, Purolator International, Houston, Texas USA. He is the author of the People Buy from People Blog at http://sellingtomorrow.blogspot.com. Contact him at skaram@purolator.com.

february 2012 | www.PARCELindustry.com

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A Roa to Warehouse Organization and Optimization If organizing your warehouse is on your list of New Year’s resolutions, here are some key considerations. By Susan Rider

It is the season for New Year’s Resolutions! Optimizing your warehouse is one way to enhance customer service and add dollars to the bottom line. First, let’s review some things that can be done without any capital investment. Second, we will look at areas where an investment may increase efficiency and productivity, returning a significant savings in the future. Third, we’ll review and identify personnel opportunities that will optimize areas.

Review your Design Ask yourself these questions:  Has your operation changed since you first designed the receiving area?  Is there a more efficient way to lay out that area to eliminate walk time and touch time?  Do you receive in stages?  Would it make more sense to receive and putaway in one move?  Is there paper in this area, and what are you using it for?  Are you adding license plates to pallets; if so, how many?  Are you checking for count, quality, etc for all vendors or just a few, and can this be streamlined?  Are you keeping a vendor scorecard so you can reconcile problems that continue to happen over and over again? Putaway is the next logical step. Are you putting the product away to a reserve storage location only to have someone else move it the same day to an active pick zone? What is your putaway logic; first available slot, family group, picking area? If you change your putaway logic, will it make your travel time less and increase your replenishment efficiency? Replenishment to Active Pick Zone. This is an area that is oftentimes overlooked but can have a big payback. Review how many times you replenish an active pick zone a day or week. Can a change in the size of the location in the active pick zone reduce replenishments and keep the order filler

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from waiting on product? If your replenishment personnel are replenishing a pick module with carton flow rack, a good habit to enforce is pushing the product forward. Too many times the order filler has to stop picking and reach back in the rack to get the new product that is stuck at the end or mid-way. If you have a lot of “grabber poles” for the order fillers, that will prove there is opportunity in this area. The idea is to keep the order fillers picking and not fixing other problems. Do the rails in the rack need realignment or have they popped out of their station? Does it flow, and the dividers are working? How is your warehouse slotted? Slotting is the next huge opportunity. Have you optimized your warehouse space utilization, or is there honeycombing (empty spaces in the middle) happening in the storage area? The design you currently have may have been perfect initially but business process change has now reduced its efficiency. A good idea is to re-look at the warehouse as if you are just starting it up and see if you would lay it out in the same way. In the active pick area, re-slotting the area can many times increase order picking efficiency by 15-20%. Areas that are overlooked are: heavy items on top, family groups of items that are picked together, size of the location appropriate to velocity of item. Fast movers should be in the golden zone to reduce bending and reaching for the order fillers. Value Added Services In some warehouses, this area is set up in stations and ergonomically has some opportunities. Watch the person performing the task and see how much bending, twisting and turning is being done. Are they sitting? Usually, sitting is not the most efficient solution. Can the station be organized in order to have ample supplies for a day’s work so the packing person doesn’t have to refill the station daily? If you have more than one shift, is the next shift being set up for success so that the people working that station are productive as soon as they come to work? Setting the next shift up for success in every functional area of the warehouse is a good idea because usually the workers stop being productive at least a half hour before quitting time. You can take advantage of that non-productive time by at least eliminating or reducing the amount of time the next shift has to spend getting ready to do the work. Review the amount of time each area takes to actually get started to work on the shift. Sometimes it can be 45 minutes or more before they gather all their tools to perform the work for the shift. Order picking is an area usually with big opportunities in optimization. One easy way to identify your opportunities is to benchmark your picking rates. Are you on the upper level of piece picking? Case picking? Pallet Picking? If not, you have opportunities to optimize. If you are still picking with a paper pick list, look at it. Is it easy to discern the quantity or is it in a 6pt font? How about the location? If you are using an RF gun, how many scans do you require? Is this the most efficient method? If you are using pick to light order picking, your order filler has the opportunity to be very efficient, so remove any barriers to that efficiency. For instance, box or tote availability, packing 16

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materials, opening the box in the rack (consider moving this task to the replenishment person), pack size errors, etc. The packaging and shipping area usually has opportunities for an ergonomic redesign. Keep the packers doing their jobs and not running all over the place looking for boxes, tape, box cutter, etc. Review the design and packaging material. Is it still the best solution for your business?

SySTemS WmS Are you using a warehouse management system? Software has the potential to increase your productivity and throughput sometimes up to 50% or more. Technology has advanced so much in the last few years that there are many good systems out there that will meet your needs. Some have better widgets than others, but if you are looking to select a new system, a good idea is to equate a new widget with a return on investment. Don’t forget about visibility tools because these can help your operation go from a reactive organization to a proactive organization. Investigate your options thoroughly and don’t always believe what the salesperson tells you. If you already have a WMS and it is more than five years old, you may want to review what the new upgrades will add to your operation as far as return on investment. You may also have an opportunity for training. The odds are there has been some turnover since the system was initially implemented and the domain experts have left the company. Usually when this happens, all the knowledge about what the system can actually do has not been exchanged; therefore, companies could be using only 30% of the available functionality. Order management This is another opportunity for optimization. When are orders being released? Is the customer service department holding them and releasing them in one lump sum, or are you getting them as they are processed and then batching? This area is another hidden gem!

PeOPle Saved the best for last! Your people are your most valuable asset and can help you get optimized and organized. The New Year is an opportunity to evaluate your team and come up with motivation plans, passion building plans and succession plans for a super star team. It may be a good time to upgrade some key folks or to coach them to success. Examine your turnover rate; if it is high that could mean your team is lacking some leadership skills or that your people need the focus. Reducing the amount of turnover will eliminate a lot of headaches and is a key factor in increasing optimization. Focus on your team by functional area and challenge your leaders to get incremental increases in throughput or productivity. Be creative on motivation techniques. Career Systems International did a study and the top five reasons people stay at companies had nothing to do with compensation.

SuSan RideR is Owner, Rider & Associates and Logistics and Supply Chain Consultant. Visit www.riderandassociates.net for more information.


From Wasp Barcode Technologies

Inventory Nightmares –

The Case of the Vanishing Business Assets

NO

one enjoys hunting down misplaced items. Just think of the panic and terror that travels throughout our minds when we misplace our wallet or car keys. For logistics managers, this state of panic is taken to a whole new level when key assets or inventory items vanish from the stockroom or in transit from point A to point B. We can’t stress enough how important it is to have a solid inventory control or asset tracking system in place within your business. If you don’t believe us, then you’ll want to continue reading, but be warned, you may be in for a scare. We’ve listed some of the worst inventory nightmares that may just make you think twice about tracking your important business items.

one was exposed to the container’s toxins. However, we’re sure FedEx re-examined its tracking methods after the close call.

Vanishing Military Weapons A few missing ink cartridges are nothing to worry about in comparison to our next story. Last year, a massive hunt took place to track down thousands of military issued rifles, machine guns and rocket-propelled grenade launchers. The weapons were to be provided for the Afghan National Police, but mysteriously vanished. A breakdown in communication and logistics was to blame for the missing items. At this time, the whereabouts of the missing weapons is still unknown.

The Forgotten Medical Supply The Missing Radioactive Container Back in 2010, FedEx was given the responsibility of delivering a highly sensitive package. No, we’re not talking about your 52” LED television. FedEx was to move a package containing radioactive rods used in CT scans. What happened next was most unfortunate. The shipment of radioactive material was lost somewhere in transit to its destination. Radioactive material doesn’t vanish on its own, does it? Thankfully, before widespread panic sunk in, the package was finally recovered and no

Each year, medical errors in surgical procedures cost the healthcare industry nearly two billion dollars. The most common surgical error is accidentally leaving surgical sponges inside of patients, which can lead to serious infections and sometimes death. Such items are easily overlooked as they can blend into their surroundings during medical procedures. To further prevent such medical nightmares, barcode technologies are being implemented into hospitals to better track medical sponges as well as other surgical tools.

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IS A WAREHOUSE MANAGEMENT SYSTEM RIGHT FOR YOUR BUSINESS? Before making such a big decision, it’s wise to take these factors into account. By Curt Barry

M

anagement has decided to upgrade its Order Management System (OMS). The company will look at Enterprise Resource Planning Systems (ERP) as well as industry specific OMS. As the Director of Operations, you will represent the warehousing and distribution functions to be sure the new system fits your needs. How do you know whether your business can benefit from a Warehouse Management System (WMS)? Many warehouses and distribution centers run quite well with warehousing functionality from Order Management Systems (OMS) or Enterprise Resource Planning (ERP) systems. So how do you determine whether a WMS will bring added functionality and benefits? This article will help you sort out the information and productivity advantages that WMS generally have over OMS and ERP.

What Are Your Requirements? In our consulting practice, we have assisted hundreds of companies with identifying their warehousing and distribution center system requirements and objectively determining the answers to which type of systems fits best. First, it’s always best to analyze your present business and the order and product profiles and the future business that management envisions to determine the functional requirements.

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This sounds straight forward. However, what we see more often is that system selection teams immediately call in software vendors of a wide variety of systems. The requirements never get thoroughly developed and documented. Therefore the company doesn’t have written requirements, which are necessary to meet the present and future functions. The discussion with the vendor stays at too high a level. “Is your system used to fulfill e-commerce orders?” “Do retailers use your system to replenish stores?” Many vendors can say with a straight face “yes” to those questions. But the only important thing for your company is how your detail functions match up to their capabilities and at what investment. The downside of not doing this homework upfront is that you may not have the full function solution you think you have and will require unanticipated modifications during the implementation process.

The warehouse system functionality has to be able to provide a variety of different methods to operate different parts of the operation. It is essential to provide these different processes based on a given warehouse, the required functions, warehouse zone, product differentiation, order profile, etc. These varied requirements fall within the flexibility and capability of most WMS products. Whether it’s complexities from multiple channels or changes in other business functionality, warehouse managers are required to react to these different environments. Distribution center managers are being asked to perform multiple tasks requiring a wide variety of flexible functionality. Having the flexibility to manage different tasks for different divisions of the business in the warehouse and apply the appropriate business rules and processes to these various segments separates most WMS software from other OMS or ERP options.

Supply Chain

Flexible Process Options As business becomes more multichannel oriented, the product assortment and order profiles often change dramatically. Brick and mortar retailers today have e-commerce channels. These two channels have widely different needs for carton and pallet oriented units of work versus e-commerce small order pick, pack and ship. These business differences also use different modes of outbound transportation, manifesting and shipping systems. In e-commerce, to build confidence with customers, take back returns and repackage or refurbish products — these are major customer service functions retail distribution centers never have to deal with. Third party (3PL) fulfillment is becoming more commonplace. 3PL companies need the ability to tailor their warehousing and distribution functionality to their multiple clients’ ever-changing requirements.

Retailers and e-commerce companies want more flexibility in their supply chain with their manufacturers and wholesalers. A trend is to push value added services and functions up the supply chain. Vendor compliance procedures and supply chain systems requirements often vary widely between companies. What supply chain functionality does your business need? One function that allows the warehouse to better prepare for receiving goods is being able to receive Advance Shipping Notices (ASN). This functionality is usually standard in the WMS applications. ASNs allow the receiving manager to schedule staff and be prepared for deliveries before the truck arrives at the loading dock. The ability to know the scheduled merchandise expected receipt arrival dates and the merchandise that is expected will not only speed up the receiving process but also improve the flow of goods through to put away. There are major differences in function that are available between many WMS and OMS in supply chain functions. There may be ship direct to stores or cross dock retail supply chain network requirements which e-commerce companies would never need.

Receiving Receiving is where the systemic warehouse processes begin and what is able to be done effectively, efficiently and accurately in receiving sets the watermark for the rest of the warehouse functionality. Where does the receiving process start within the application system? Is there interface to Supply Chain? Is there a dock receiving system or does it start downstream entering receipts? Is there RF and scanning of cartons and pallets as a starting point? What critical warehousing functional data is not captured in the system (e.g. vendor compliance, client product inspection or QA)? WMS may provide a higher level of function.

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Picking Options Order picking is one of the major expenses in operations. Applying the most efficient pick functions to your operation increases productivity. Some of the picking options that are available in many WMS packages include:    

Single order pick Batch pick and sort Wave pick Cross Dock

   

Cart/Bin pick Zone pick Pick and Pass Dynamic “Hot Pick”

In addition to these traditional picking options, many distribution centers require more technology to improve picking. Voice picking and pick to light have been successfully interfaced or integrated with most WMS software. One key capability is to preview the order queue to determine what orders are available to be processed. Rather than pushing all orders to the floor as many OMS do, WMS often give you the option to select the order volume or type of orders that you want to process. This often gives you greater ability to manage higher priority pick batches and give more skilled workers more complex order batches.

Inventory Management Inventory is usually the largest asset in most companies. WMS applications offer advantages over most other systems performing basic inventory control for tracking inventory throughout the

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warehousing functions and processes — from receiving, inspection, put away, forward pick replenishment, order processing, picking, pack confirmation, shipping, returns processing, etc. OMS or ERP may not provide the complete range of Radio Frequency (RF) and the use of bar coded locations and product, the ability to dynamically move inventory from one location to another. The status of product in real time gives a more timely and accurate picture of your inventory and its components. Most Order Management (OMS) and Enterprise Resource Planning (ERP) type systems will support basic physical or cycle counting capabilities maybe only after hours. However, more sophisticated cycle counting methodologies are generally supported through a WMS. Another difference between systems is use of different events to trigger cycle counts. This functionality will achieve greater inventory accuracy and result in less “warehouse back orders or can’t finds”.

Production/Assembly Your business may require the capability to plan, track and assemble kits. ERP systems may have a manufacturing and multilevel heritage; OMS often have only a single level of kit tracking. Most WMS software applications have the ability to track the production tasks and manage the component inventory as well as the final assembled products. The ability to track component inventory; plan and track labor usage; and track the status of the work order status are key functionality within most WMS applications today.


Labor Tracking Another area WMS systems standout from OMS/ERP is in the area of labor usage and tracking. Labor often is more than 50% of the total cost per order when you consider all costs. What labor functions do you need to improve productivity by individual and department? With the ability to capture, and measure and feedback your staff’s performance often leads to increased productivity -as much as 10% to 15%. If you are considering any type of incentive pay, it will require accurate capture and reporting of productivity. Another labor management aspect is to be able to perform task interleaving to increase productivity by combining multiple operations within a given aisle or zone. This functionality is not normally found outside of WMSs.

Best of Breed Integration A standalone WMS, either interfaced or integrated to an OMS or ERP systems, is an option many larger companies implement. One advantage that specialized OMS and ERP have over a “best of breed” interface is that all functionality and data bases are seamlessly integrated and allow on-line functions across the enterprise. This on-line integration may not be realistic in an OMS or ERP to WMS integration.

Other WMS Modules For large and complex warehouse and distribution center environments, WMS may provide other critical functions that OMS

and ERP do not have. These may include Demand Forecasting, Transportation Management, Yard Management, Warehouse Space Management (Cube Utilization), Slotting Management, Material Handling Equipment Integration and modules which are options and may only be available with Warehouse Management Systems.

System Tier Levels Not all WMS are created equal. Software vendor offerings can be separated into tiers of functionality which also correspond to investment. Again, develop your requirements and be sure how the offerings differ.

Summary Do your homework and get your mission critical requirements documented. Many OMS and ERP systems provide all the warehouse functionality a company may require. Be objective and identify how additional WMS capabilities will increase productivity and reduce warehouse costs. Do these functions require a WMS? Secondly, prepare a return on investment (ROI) and benefits study for an new system. Does WMS give you more feature and function and an ROI?

CURT BARRY is president of F. Curtis Barry & Company, a multichannel consultancy specializing in warehousing layout and design, systems selection and implementation, benchmarking and cost reduction. Contact him at 804.740.8743, cbarry@fcbco.com, or www.fcbco.com.

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T

OPTIMIZE SCANNING & LABELING THE WIRELESS WAY Mobile powered workstations can drastically reduce employees’ footsteps through the warehouse — and productivity soars in the process. By Christine Wheeler 22

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hanks to wireless technology, mobile powered workstations (MPWs) are opening up new frontiers of efficiency, productivity, and profitability. These carts with integrated power supplies carry computers, scanners, and printers of all kinds, reducing foot travel and paperwork wherever they go. Capitalizing on the benefits of auto-ID technologies, MPWs integrate a facility’s software with wireless devices to establish mobile label-printing stations, mobile shipping/receiving stations, and so on. In many enterprises, countless hours are wasted as employees walk back and forth, chatting with co-workers en route, between sites where work is taking place (loading docks, storage racks, assembly lines, inspection/testing areas, etc.) and a deskbound computer and printer where they log information into a database, print labels/orders, etc. Often, these employees are merely keying in data they have previously written on paper at the work site — a classic redundancy of effort. Or worse, they just rely on their memory, which leads to mistakes. In contrast, an employee operating an MPW has continual, paperless, real-time access to information via warehouse management systems (WMS), enterprise resource planning (ERP), or automated data collection (ADC) software from anywhere in the facility. “With real-time data transmission, warehouse and distribution management can make better business decisions and adjustments based on immediate data received from the floor,” says Julie Leonard, marketing director for BarCode ID Systems, systems-integration experts who design and install comprehensive automated data collection/management systems. Because an MPW can carry a computer and relatively heavy peripherals (such as a high-volume label printer) and can supply them all with adequate on-board power, it is more versatile than a handheld scanner or thermal printer. If you already own the computers that the carts will carry, it is also less expensive than converting to handhelds, according to Leonard. An “on-demand” high-volume label printing/PC station saves time and labor because it enables the use of thermal transfer labels, large labels, more than one type of label, a full computer screen to toggle between different software programs, and more. In essence, you have a fully functioning packaging/labeling/processing/inspection station that can be moved to wherever it is needed. Although a large facility might need more than one, a single MPW can often do the job of two or three stationary desks, which means fewer computers and peripherals will be needed overall. For example, a workstation can be used all morning at a receiving dock and then wheeled to the shipping department for the afternoon. In warehousing/distribution, an MPW can increase the number of items processed per day by facilitating receiving, packaging, shipping, put-away, order picking, inspection, cross-docking, inventory management, etc. With such streamlined operations comes improved accuracy, in part because stock-keeping units (SKUs) can be identified with barcode scanners and immediately entered into or checked against the facility’s database.


In a receiving department, for example, the MPW operator can quickly scan barcodes to identify an incoming shipment and then inspect, re-label, and re-route it, all at the same workstation. In shipping, accuracy improves when the operator can quickly scan outgoing shipments to verify that the order is correct and scheduled for the proper shipping method. For breakbulk and mixed-unit orders, MPWs allow fast, on-site printing of labels, packing slips, delivery receipts, refund receipts, etc. The operator can track previously shipped parcels and keep track of multiple SKUs. He or she can even take and file digital photos to provide proof of the condition of a returned shipment and then credit the customer immediately.

MPWs in Action Shipping accuracy was a major concern at the Magneti Marelli Powertrain USA plant in North Carolina. Management was determined to reduce the number of mislabeled outgoing pallets loaded with fuel-pump modules, electronic throttles, and other component systems bound for automakers, boat builders, and other customers. A typical shipment consisted of multiple pallets, each of which required at least two labels. The weak point in the shipping department turned out to be the 30-40 steps each inspector would have to take to the label printer. Sometimes, after an inspector had retraced his/her steps, labels in hand, the labels would end up on the wrong pallets. The number of errors

Photo 2: One of several mobile powered workstations in use at a Care-A-Lot Pet Supply distribution center in Virginia. The company, which purchased more workstations for its retail stores, reports a productivity increase since they were introduced.

was significantly reduced once the company purchased MPWs. Now, every inspector can scan and print labels right beside the pallet that needs them. Thanks to swivel casters, the workstation can be easily maneuvered to the next pallet in seconds. For put-away, SKUs can be easily barcode-labeled/re-labeled as they are put on shelves, which can also be labeled. That way, when the time comes to pick the item, it is more likely to be where it is supposed to be. And then there is directed picking — coordinated picking for multiple orders. When you and the MPW are on a particular aisle, the system’s software can tell you what other items are needed from that sector of the warehouse. Inspection is another use of an MPW. In a manufacturing plant, for example, parts in storage can be labeled, tracked, and picked as above when needed for assembly, but finished products can also be inspected and labeled easily. The facility’s database can include the date each product was inspected and the name of the inspector. Some systems require inspectors to log in with identifying passwords, while others have them scan their badges, for example.

Choosing the Right One Obviously, different needs require different MPW configurations, so shop around until you find the model that fits your facility. Some basic attributes, such as sturdiness and durability, trump other characteristics, but the best MPWs are also ergonomic. For starters, the one you choose should have adjustable shelves and large, stable work surfaces. Some units allow the shelves to be easily raised and lowered, and some do not. A tall employee should be able to quickly raise a shelf to the most convenient height, and a shorter worker on the next shift should be able to lower it just as quickly. Casters should provide years of smooth, quiet rolling and positioning, yet must be lockable for stability and safety at the work site. The more your workstation can do, the more your business can accomplish, in ways you might not yet envision. That’s why you’ll want your new MPW to be versatile. Check the weight capacity of individual shelves and of the unit overall. For maneuverability in narrow warehouse aisles, a small “footprint” is important. The cart you buy should definitely be powerful enough to run various devices simultaneously — look for one that can hold and power four devices for at least eight hours and can be recharged in five to eight hours. Choosing the best MPW power package for your business can be difficult on your own. Some manufacturers (and intermediaries such as BarCode ID Systems) have technicians who will make sure your package is fully integrated with the cart and the devices you intend to run. Some even have software tools on their websites that help the customer choose the most appropriate power package by calculating the total wattage of the equipment to be supported.

Christine Wheeler is Marketing Director for Newcastle Systems. You can contact her at 781.935.3450, 978.777.1803 (fax), sales@newcastlesys.com, or visit www.newcastlesys.com for more information.

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on s n i tch u lH ar C By 24

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Understanding Rolling Averages Used by Parcel Carriers Your invoice is a key component in managing your transportation spend—but many don’t understand it in its entirety.


Some of the most frequently asked questions I receive from shippers of all sizes regard rolling averages used by parcel carriers. Typical questions include:  What are rolling averages used for?  How are rolling averages calculated?  How can I tell what the carrier has

calculated my rolling average to be?  Why is it important for me to under

stand rolling averages?  What is the impact if my average

changes significantly?  And many more.

The two major parcel carriers, FedEx and UPS, use several different types of discounts when working with shippers. A typical carrier agreement will have multiple types of discounts, or discount structures, in the agreement. The type of discount offered might differ depending on the service for which a discount is offered. In many cases, however, multiple types of discounts will be offered, and apply cumulatively, for a single service. In most agreements with shippers, the carriers will tie at least a portion of the discounts offered to the amount of revenue the carrier receives from the shipper. This is the discount, or portion of a discount, that is affected by the rolling average.

And two other areas that occasionally will include Earned Discount sections:

1. Export Express Services 2. Import Express Services The easiest way to find if an Earned Discount applies is to look for a box with three columns under the Earned Discount heading. The columns in the box include: one listing the services for which the earned discount applies, one listing the annualized base transportation charges used to determine the amount of discount, and one listing the Earned Discount percentage. The column listing the annualized base transportation charges will have dollar amounts given as ranges. For each dollar range, there is a corresponding Earned Discount that will apply to the services listed in the first column. If there are other types of discounts for a given service, such as base for Express or weight/zone based for ground, then the Earned Discount is an additional discount. If there are no other discounts for a specific service, then the Earned is the total discount that will apply. When UPS includes this type of discount for all, or a portion, of the discounts in an agreement, it is most likely in a section titled “Portfolio Tier Incentive.” However, occasionally there will be an individual tier listed for each individual service. The Portfolio tier will have a grid listing services down the left side and then columns (typically six but there may be fewer) that each list a revenue range at the top. For each service a discount percentage is listed under each revenue range that will apply for that service. If there is another discount listed for a specific service then the discount listed in the tier is and additional discount for that service. If there are no other discounts for a specific service then the discount listed in the tier is the total discount that will apply.

Rolling averages are used to determine discount levels tied to revenue from a shipper. For FedEx, the rolling average is used to determine the level of the “Earned Discount.” For UPS, the rolling average is used to determine the appropri- What Does the Rolling Average Determine? ate revenue band used in the “Tier” portion of a discount, The rolling average is used by the carriers to determine which whether the tier is listed by individual service or as part of discount percentage from the agreement to use. The determia “Portfolio Tier Incentive.” Although FedEx and UPS list nation is done each week. revenue levels differently in their respective agreements, the calculation of the rolling average is roughly the same at How Is the Rolling Average Determined? FedEx uses the language “base transportation charges” and UPS either carrier. uses the language “cumulative gross transportation charges.” Where Do I Find Discounts Affected by the Rolling Average Simply put, this means the published charges (in other words, the charges before discounts are applied). It is important to note in My Agreement? When FedEx includes this type of discount for all (or a portion) that only “transportation” charges are included; i.e. most surof the discounts in an agreement, it will be listed in a section charges, like fuel surcharges, do not count towards the total. Both carriers calculate the average every week. FedEx then with the heading “Earned Discounts” for the applicable service. There are three main areas in a FedEx agreement that takes the average and multiplies it by 52 to get an “annualized” number that is then used to determine which range usually include Earned Discount sections. on the agreement is applicable to determine the appropriate 1. US Domestic Express (includes all overnight, 2-day and 3-day services) Earned Discount(s). UPS simply takes the average to determine which tier band is applicable to determine the appropri2. Ground Single Piece ate discount(s). 3. Home Delivery

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The average is calculated starting with the commencement of a new agreement, or after applicable “Grace” or “Ramp Up” period expires. The total amount of transportation charges for each week are totaled together and divided by the number of weeks to determine an “average.” The average is then used to determine the appropriate level. It is important to note that the charges from the current invoice are not part of the calculation. For example, if a shipper just received the invoice for shipments during week 5 of a new agreement, the average would be calculated by totaling the transportation charges for weeks 1, 2, 3 and 4 then dividing by 4. Week 6 would use weeks 1-5 divided by 5. This continues until the number of weeks listed in the agreement is reached. FedEx lists under the heading “Frequency” and UPS states “based on a __ week rolling average.” With very few exceptions, both carriers use 52 weeks. The average is called a rolling average because after the shipper reaches the specified period, i.e. 52 weeks, the charges from the oldest week drop off and the charges from the newest week are added. As an example, the invoice received on the 53rd week of an agreement would use the totals of weeks 1-52 divided by 52. The following week (week 54) would be calculated using totals from weeks 2-53 divided by 52. Each new week only the most recent 52 weeks would be used in the calculation.

How Can I Know What the Carrier Has Calculated My Rolling Average to Be? The rolling average used by the carrier can be found on a shipper’s invoice, either on a paper copy or on a PDF version if invoiced electronically. On a FedEx invoice, the number can be found in the detail section of an invoice for a service for which an Earned Discount applies. For example, if an Earned Discount applies to FedEx Ground packages, the shipper should find the section with details on ground shipments. In the small print above the detail for each package, there will be a sentence that reads “The Earned Discount for this ship date has been calculated based on a revenue threshold of USD $XX,XXX.” The dollar amount listed will be a weekly number so the shipper would then multiply by 52 to find the “annualized” amount that can then be compared to the Earned Discount portion of the agreement. On a UPS invoice there will be a section titled “Incentives” in the first few pages of the invoice. This section will list totals with published charges and incentive credit for each service level. For services where a tier incentive applies there will be a sentence stating “Tier incentive based on an average weekly revenue of $XX,XXX for W/E: mm/dd/yyyy - W/E: mm/ dd/yyyy.” The dollar amount listed will be the weekly average which can be compared to the tier portion of the agreement. Note that UPS lists the date range used to calculate the average so a shipper can see whether or not they have reached the full 52 weeks.

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What Is the Impact of the Rolling Average? It is important for a shipper to know, and monitor, their rolling average because changes can impact the discounts they receive. If the average goes down, a shipper may not be receiving the level of discount that they believe they are. Fifty-two week averages can help shippers by maintaining a more consistent level of discount despite minor ups and downs in their shipping patterns. Once 52 weeks is established, spikes up or down will typically not move a shipper from one level to another. Constant awareness is important as a gradual decline over time may have a negative effect. Many shippers in the recent economy have gradually declined in volume shipped and may have fallen to a lower discount level without realizing that has occurred. If consistently monitored, shippers can spot potential issues and work with their carriers to find a solution beneficial to both parties. Because the carriers are worried about a shipper diverting volume to a competitor, the drop in discounts moving downward can be significant. If the carrier understands it is not due to diversion, they are typically open to finding a positive solution. Shippers must also be aware of the impact if a new agreement is set based on averages when the shipper is “seasonal” in nature. If the new agreement were to start shortly after the heavy shipping season, the shipper may not qualify for the intended discounts for quite some time. There are things the carrier can do for the shipper in this case but only if the shipper is aware and communicates with the carrier representative during the establishment of the agreement.

Conclusion With very few exceptions, carrier agreements today will have at least some portion of discounts tied to charges paid to the carrier by the shipper. When this occurs, discount determination will be based on a rolling average of charges. It is vital for shippers to understand how the rolling average is calculated, what their rolling average is and how it affects the rates they pay. By staying informed, the shipper will be better prepared to communicate with their carrier representative and build an agreement beneficial to both parties. It will also help them understand how to monitor and address any issues that might arise due to changes in the shipper’s circumstances. Communicating in advance always saves time, prevents misunderstandings and potential hard feelings between the shipper and their carrier.

Carl HutCHinson has over 25 years of experience in the transportation and logistics industry, both domestic US and International. Carl is currently the Executive Vice President of iDrive Logistics where he helps clients reduce cost in all areas of the supply chain including; USPS, Parcel, LTL, Fulfillment, Warehousing, International and much more. Carl can be reached at 678-797-0930 or carl@idrivelogistics.com.


PARCEL COUNSEl with Brent

Wm. Primus, J.D.

Safety Ratings & Safety Measurement System (SMS): A Critical Distinction As 2010 drew to a close, the Federal Motor Carrier Safety available for public view on the FMCSA’s website. A score of Administration (FMCSA) began publishing on its website data 60 or 65 (or higher), depending upon the category, will result compiled and generated as part of an initiative called CSA — in a small yellow triangle containing an exclamation mark to Compliance, Safety, Accountability. Most transportation pro- also be posted. This symbol replaces the word “alert,” which fessionals who follow these developments understand that CSA was in use for an initial period of time. and the Safety Measurement System (SMS) data are a replaceAlthough there has been much discussion as to whether ment for a prior system known as SafeStat. and how the BASICs scores should be used by a shipper However, it has been my observation that many persons are to select its carriers, the position of the FMCSA, as stated under the erroneous impression that CSA/SMS has somehow on its website, is that the yellow triangle is “not intended superseded or replaced the “safety rating system.” The lesson to imply any federal safety rating of the carrier… Unless a for this installment of PARCEL Counsel is that the safety rating motor carrier in the SMS has received an UNSATISFACTORY system is still very much in place and has not been replaced safety rating… or has otherwise been ordered to discontinue by CSA/SMS. operations by the FMCSA, it is authorized to operate on the By way of background, the safety rating system originated in nation’s roadways.” the 1980s pursuant to a congressional mandate. Under this The FMCSA has announced that in 2012, it intends to begin system a motor carrier is assigned a safety rating, i.e., “satis- rule making proceedings whose eventual goal would be to factory,” “conditional,” or “unsatisfactory.” These ratings are establish a set of rules that would replace the existing method decided based upon an actual visit to a carrier’s office and of determining a carrier’s safety fitness with one based upon a review of its records. Until such a visit is made, a carrier’s the SMS data and BASICs scores. Once in effect, the terms safety rating is “unrated.” “satisfactory,” “conditional,” and “unsatisfactory” could be As of January 2012, there were approximately 66,000 replaced by terms such as “continue to operate,” “marginal,” carriers with a “satisfactory” rating, 17,000 with a “con- and “unfit.” However, these terms are only under discussion ditional” rating, and 2,000 with an “unsatisfactory” rating. and will not be finalized until the rule making process is comThis means that of the approximately 190,000 motor carriers pleted — which could take years. with active authority, there are approximately 105,000 carriTo sum up, the safety rating system that leads to a carrier’s ers who are “unrated.” designation of “satisfactory,” “unsatisfactory,” “conditional,” In contrast to a physical inspection of a carrier’s records — or “unrated” is still in place. Independent of this system is a very time-consuming proposition — the Safety Measurement CSA and its BASICs scores. In future installments of PARCEL System (SMS) and its predecessor SafeStat are statistical Counsel, we will take a closer look at CSA and its implications in nature and rank the carriers in various categories. Under for parcel shippers. SafeStat there were four categories; under CSA there are seven All for now!p categories. Within each category, motor carriers are given a percentile ranking with “0” being the best possible rating and “100” being the worst possible rating. Brent Wm. Primus, J.D., is the CEO of Primus Law Office, P.A. and the Senior Editor The stated purpose of CSA, as well as its predecessor of transportlawtexts, inc. Previous columns, including those of William J. Augello, may SafeStat, is to enable the FMCSA to prioritize motor carri- be found in the “Content Library” on the PARCEL website (www.parcelindustry.com). ers for inspections and possible interventions. Similar to the Your questions are welcome at brent@transportlawtexts.com. SafeStat system, the FMCSA website will publish rankings called BASICs (Behavior Analysis and Safety Improvement Categories). For five of these categories, a carrier’s score is

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Wrap up with Michael

J. Ryan

Going Virtual… Are You Ready?

T

he new year is here, and it’s back to business. This past peak season demonstrated to us that the B2C market is continually gaining strength and undergoing a paradigm shift in the retail industry. The younger buyers are flocking to the Internet to make purchases. During this past peak season’s Black Friday, 45% of all households in America made a purchase on the Internet. By the end of 2013, it is estimated that two billion people will make a purchase on their mobile device. The use of social media is also becoming an intrinsic part of buying decisions. It is essential to have a well-structured supply chain to service this ever-changing market. Do you have the right number of distribution centers to effectively service this new market? This is an area that you should be evaluating every year because of the rapid speed of change in this market. The modern buyer has access to a lot of information and feedback from their circle of friends… which could be in the thousands. This creates a virtual buying experience and is laden with high expectations. As you evaluate your supply chain network, there are many options available to develop your own virtual network through strategic partners. In order to minimize your shipping cost, you will need a network that has three to five nodes, which will optimize your service level in a 1-2 day network. There are many highly skilled consultants in the market that can help you with this decision matrix… please use their knowledge and expertise. Parcel shipping costs are very complex because 30% of the cost comes from accessorial fees. The USPS provides an excellent option to the BIG parcel carriers for this market. They have also introduced regional pricing and cube-based pricing, which is making them even more competitive. They also deliver to each household in America six days a week… remember, it’s all about the buyer’s shopping experience. Once a buyer has a good experience, they will go back to that Internet seller to purchase again.

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We are in the midst of the “Real Time Generation,” and it is imperative that you have a nimble supply chain that can deliver a customized solution. p

Michael J. Ryan is the Director, Business Development at DSC Logistics and has been in the parcel industry for over 25 years. He can be reached at 847393-5862 or mike.ryan@dsc-logistics.com.



Parcel February 2012