In today’s highly competitive business environment, companies continually seek ways to differentiate themselves and gain a strategic edge. While pricing strategies are often the focal point, enhancing service levels can be equally, if not more, impactful. This case study explores how a comprehensive approach to service level enhancement, integrated with operational efficiency, can lead to significant competitive advantages in supply chain operations.
The Challenge
A prominent business-to-business and direct-to-consumer retailer specializing in computers, peripherals, and software faced a critical challenge. The Chief Operating Officer (COO) identified two primary avenues for gaining market share: pricing and service. However, the industry experienced significant margin erosion across all product categories, leaving little room for price reductions. Consequently, the focus shifted to improving service levels without increasing operational costs. The typical industry model offered next-day parcel delivery for orders received by a 2:00 to 3:00 PM cutoff. The COO posed a pivotal question:
“How do I accept orders until 10:00 PM and guarantee next-day parcel delivery at an equal or lower cost to serve?”
Strategic Approach
Our team of consultants, engineers, and analysts embarked on a comprehensive analysis of the company’s operations to address this challenge. The objective was to identify innovative solutions to enhance service levels while maintaining or reducing operational costs.
Designing the Solution
After extensive data analysis and evaluation of various alternatives, the team proposed a solution centered around a strategic partnership with a leading parcel carrier (following a competitive bid process). The key components of the solution included:
Long-Term Contract Negotiation: Securing a long-term agreement with the parcel carrier, incorporating escalation clauses linked to inflation, labor, and fuel costs. This approach ensured stability and predictability in shipping rates over the contract’s duration. It has been impossible to “switch” carriers, so this long-term approach was critical to a successful outcome.
Strategic Location Selection: Building a 200,000+ square foot distribution center on the parcel carrier’s runway. This strategic placement eliminated transit times and facilitated seamless integration between the retailer’s operations and the carrier’s air operations.
Advanced Facility Design: Implementing high mechanization, automation, and advanced human-machine interface (HMI) to process over 100,000 order lines daily. This design enhanced operational efficiency and accuracy.
High-Speed Sorting System: Installing a 40+ lane outbound high-speed shoe sorter that penetrated a demising wall allowed parcels to be automatically scanned and consigned to the appropriate carrier. This system effectively performed the carrier’s zip code sort, reducing the need for additional handling within the carrier’s facility. The parcels never moved into the carrier’s facility.
Cost Reduction Measures: Negotiating significantly reduced shipping rates, as the carrier benefited from not having to pick up, load/unload, and sort parcels destined for their processing facility.
Operational Execution
The redesigned distribution center operated as follows:
Order Processing: Orders were accepted until 10:00 PM, processed through the automated system, and prepared for shipment.
Sorting and Consignment: Parcels were sorted via the high-speed sorter, automatically scanned, and consigned to the appropriate zip code destination lane.
Carrier Integration: Once sorted, carrier personnel loaded parcels into air freight containers at the end of each lane. The last order was accepted at 10:00 PM, processed, and loaded onto the aircraft by 2:00 AM, ensuring next-day delivery.
Results and Benefits
The implementation of this solution yielded several significant benefits:
Enhanced Service Levels: The ability to accept orders until 10:00 PM and guarantee next-day delivery provided a competitive edge, meeting customer expectations for faster service.
Operational Efficiency: Integrating automation and strategic facility placement streamlined operations, reducing manual handling and associated errors.
Cost Savings: Negotiated shipping rates and reduced handling requirements led to lower operational costs, improving the company’s bottom line.
Strategic Advantage: The combination of improved service levels and cost efficiency positioned the company to capture increased market share, effectively leveraging supply chain operations as a strategic asset.
This case study underscores the importance of integrating strategic and tactical considerations when designing or retrofitting distribution operations. By focusing on service level enhancement as part of the operational efficiency effort, companies can achieve a competitive advantage that meets customer expectations and drives profitability and market growth.
