As solutions go, it looked like a winner—an elegant design that would resolve a nagging productivity problem at a $15 billion retailer's DC. Though reasonably productive, the center's existing picking process left it with mounting numbers of leftover cases containing individual SKUs that were piling up and getting in workers' way. Problem was, the engineers' solution called for a $4 million capital investment—money that just wasn't available. Sent back to the drawing board, the engineers, working with consultants from The Progress Group, came up with a solution that used existing conveyors to return partial cases to the main induction station where they'd be available the next time a pick wave called for that SKU. The solution wasn't perfect, but the price was a lot closer to right—about $100,000.
That story is being echoed in DCs around the country. Caution is the byword where almost any major capital spending proposal is concerned. Short-term, lowcost projects with quick payback are getting the green light, while projects that promise a bigger payback but a slower return on the investment are put on hold. The trend has left companies looking for ways other than capital spending to cut costs, improve productivity and enhance service.
Sometimes that calls for creativity. "Clients are looking for innovative ways to make do with what they have …," says Art Van Bodegraven, partner emeritus of The Progress Group. "[They're] coming up with clever layouts or slotting methods, or seeing if they can tweak the material handling systems instead of replacing them. They're not really shelling out big bucks."
Dave Stallard, a founding partner of The Progress Group, concurs. "[Clients] are more comfortable making investments in innovative solutions where they get more back for their buck," he says. One of his customers, an apparel company, recently added some controls to its receiving conveyors , for example. The controls link advance shipment notice information to the cartons coming in the door; an ink jet printer marks each carton with a simple symbol that tells workers in the facility how to palle tize the goods. That gives the distribution center the option of using part-time help with less training. At the same time, it provides management with a better accounting of the goods in each inbound container.
Proceeding with caution
That's not to say it's all quiet on every f ront. Some companies are gritting their teeth and spending. Unilever, Procter & Gamble and J.C. Penney, among others, have made major investments in their distribution networks over the last few years.
Hal Vandiver, executive vice president of the Material Handling Industry of America (MHIA), adds that while orders for material handling equipment generally sagged in 2001 and 2002,the pain was not felt equally. "Depending on their business approach, some [vendors] never saw any downturn at all," he says.
But they were certainly the exception. An economic brief published by the MHIA in May showed that new orders for the types of material handling equipment covered by its surveys declined by 11 percent last year from 2001 levels, closing the year at $16.3 billion. Shipments fell by a similar percentage, closing at $16.6 billion.Total U.S.consumption, which includes imports and excludes exports, fell by 8.8 percent to $17.6 billion.
Still, there are glimmers of hope: Orders in the fourth quarter were up 3.2 percent over 2001 levels. And new orders in 2003's first quarter ran 4.2 percent ahead of the first three months of 2002. The material handling industry, according to an analysis by The Business Alliance/MAPI, has entered an accelerated growth phase in the economic cycle—a phase MHIA forecasts will last through the first quarter of next year.
Vendors can't expect to sit back and let the rising tide lift their ships, however, says Vandiver. "They're going to work harder than they have worked in 15 years to realize significant gains," he predicts. "In the last decade, you could row your boat to the middle of the pond and the fish jumped in. Today, even with an improved economic environment, we're not going to approach that."
Though Vandiver doesn't expect to see major plant and equipment expansions right away, he's identified two potential growth areas for his organization's members. One lies in distribution logistics. "There is probably a lot of room for improvement in the way manufacturing connects to the marketplace through DCs," he reflects. "My hunch is that we're going to see more opportunity on our customers' behalf in those arenas."
He also notes that companies are closing what MHIA calls the "innovation gap" by replacing aging equipment and yesterday's technology with updated versions that promise big gains in productivity.
Ed Reel, senior vice president at Peach State Integrated Technologies, agrees. He reports that clients are looking hard at their legacy warehouse management systems. "A lot of them are disparate systems that have been modified and are hard coded. They are not performing optimally," he contends. "You can dump money into your legacy system or look at the best of breed [alternatives]." Updating a warehouse management system (WMS) or transportation management system (TMS) can provide a quick return on investment, he says.
Apparently, that message is getting out. "A lot of people are starting to look at investing in WMS again," Van Bodegraven reports. "There is only so much you can wring out of systems that have been around for years." Then too, he adds, marketplace competition has made WMS packages aimed at mid-sized companies more affordable.
Yet even in cases where they've gotten the green light to spend, few companies are making investment decisions quickly. Stallard reports that he recently completed a modernization design for an athletic shoe manufacturer's DC. " It's been typical in the past to get the go-ahead in weeks. Now, it's taking months," he says. "Even though they've decided to do the engineering work during the lull, they're having trouble mustering the confidence to pull the trigger."
John Lowry, president of Global Project Associates (formerly Lowry Technical Associates), adds that his company has responded by loading up its bids with all kinds of options. "Companies want enough to get by for now," he says. "The next option is to quote for the future. When the economy turns, capacity will be added. But when the choice is buying for now or spending for the future, most people are buying for now."