Value-added services: Getting value from adding value

More customers are demanding value-added services, but there are ways to do it so it's worth your while.

By Bob Trebilcock, Editor at Large -- Modern Materials Handling, 12/1/2007

When information technology (IT) provider CDW (800-750-4239, www.cdw.com) built a new distribution center in North Las Vegas, Nev., processes to handle value-added services were an important part of the design.

The ability to configure computers and servers to a customer's specifications has long been one of CDW's competitive advantages. In the company's primary DC in Illinois, those functions were often handled manually. In the new facility, however, it's one seamless process. Orders that involve custom configuration are automatically conveyed to a value-added services area where a technician installs custom software or a disk drive. Afterwards, those products are automatically conveyed to the shipping area where they go through the same packing and labeling processes as any other order.

“Any time you can step back and take non-value-added touches out of your operations, you can make an operation that much more efficient,” says Dan Hanrahan, president of the Numina Group (630-343-2604, www.numinagroup.com), a consulting firm that designs value-added services for clients.

Increase value-added services

Just what is a value-added service? Simply put, it's performing a function in the warehouse that would normally happen at the customer's own facility.

Value-added services are especially common in the retail supply chain. “More store-ready functions that used to be done in a stock room are getting pushed back to distributors or the DC,” says Jeff Mueller, vice president of Sedlak (216-206-4700, www.jasedlak.com). Those services may include everything from custom packaging and labeling to facilitate crossdocking at a retailer's DC to creating a special assortment for an in-store promotion.

These services are also requiring a larger share of the labor required to fill orders, according to John Spain, a senior partner with Tompkins Associates (800-789-1257, www.tompkinsinc.com). “In 2005, value-added services represented 6.9% of the total labor hours in the DCs that are part of our benchmarking survey,” says Spain. “Today, that number has grown to 10.7% of total labor hours.”

Although more labor is being devoted to value-added services, too often these services are an after-thought to a DC's operations: For instance, only 29% of the DCs in the Tompkins survey had developed labor standards for their value-added processes.

Many companies design areas dedicated to value-added services.

“Companies are offering these services, but ignoring them when it comes to designing their warehousing processes,” says Spain. “They don't have tools to manage the labor, and they haven't planned for the space or the processes to be efficient.”

That lack of control, and metrics, means even if a company wanted to charge its customers for these services, they don't actually know what it's costing them, Spain adds.

Plan for value-added services

There are several challenges to planning value-added services. For one, volumes are often seasonal and unpredictable. For another, many warehouse management systems (WMS) don't have modules for tracking inventory through a value-added processing area. But the biggest challenge to value-added services is that they slow down processes because they're not integrated with the rest of the order fulfillment flow.

“I'm working with a client now that ships baseball cards,” says Sam Flanders, president of Warehouse Management Consultants (603-868-6767, www.2wmc.com). “Some retailers want them to add a pricing sticker and some don't. Because the demand is unpredictable, the pricing operation impedes the picking process.”

For that reason, the first step to getting control is to map the processes in a way that identifies what has to be done and to identify the volumes associated with each process.

“It's not unlike setting up a warehouse,” says Bob Babel, vice president of engineering for Forte (513-398-2800, www.forte-industries.com). “You're thinking about volumes, the amount of labor required and whether you can justify automation.”

After mapping out your processes, a next step is deciding where to locate the value-added processing area.

“Because it's often not a high-transaction area, you don't want to expand your building to accommodate value-added services,” says Mueller. For that reason, Sedlak often coaches its clients to locate value-added services on a mezzanine over the receiving or shipping dock, depending on whether the service can be done before product is put away or right before it's shipped. “Depending on the volumes, we might convey material up to the mezzanine, or simply create a drop area that can hold several pallets at a time,” says Mueller.

Seasonal or sporadic processes might be located in an area already being used for another purpose. Carton labeling processes, for instance, may fit into the same area where customers do weight and tolerance checks, creating a steadier volume of product through that area, and better use of the space.

Even in highly automated facilities, often the best way to handle a process is to do it manually. These processes can be designed to be more efficient. “The most common mistake we see around value-added services is that companies need to give them attention,” says Babel. “If they analyze the process, they can often save a person or two in that area.”

Value-added services like price ticketing are still done manually.

Manual process may still predominate, but any time automation can be introduced, there's an opportunity for savings.

The Numina Group worked with one watchmaker that offers custom price labeling to big box retailers. The challenge, however, was that not every customer wanted price labeling, and not every customer charged the same amount for the same watch. But with volumes approaching 80,000 units per shift during the peak season, there was an opportunity to introduce automation.

The solution was to integrate an inline scanning and labeling process at the induction station of the order fulfillment scanner. “This way, they can still batch pick everything, regardless of which customer it's being shipped to,” says Hanrahan. “At the sorter, a UPC label on the bottom of the box is scanned, the product is assigned to a specific customer and then a price label is automatically printed and applied before it's sorted to a specific DC or store, depending on the client.”

At the same time, the manufacturer also adds hang tags to individual watches that are sold from point-of-sale displays. While that is still a manual process, there was still an opportunity to semi-automate the process and make it more efficient for the operators.

“In this case, we segregated the watches that needed hang tags into totes, and used the conveyors to route them to a semi-automated labeling system that scans the label on a tote, automatically prints the tags that will be applied to the watches at an ergonomically designed workstation,” says Hanrahan. “There is still labor involved, but it represented a significant savings over what they had been doing.”

Five best practices for value-added services While no two facilities are alike, and value-added services will vary from one customer to the next, any DC manager can improve their processes if they keep some tips in mind, says Drew Hale, a partner with The Progress Group (www.theprogressgroup.com).
1 Create uniformity in the process when possible: Requests for value-added services are often added in a text box on an order. That requires someone in the warehouse to interpret what has to be done. A better approach is to create value-added service codes that allow uniformity in the process. Like orders can then be released together, and managers can do analysis to determine how much a service costs to perform.
2 Employ activity-based costing: Most of the time, the pricing for value-added services doesn't reflect what it really takes to perform the service. Hale urges clients to create simple engineered standards to do activity-based costing: That might include a base cost for moving a case, adding a ticket, and printing and applying a label. "If you want to know what value-added services are really costing, you have to align it with labor standards and unit load movements," says Hale.
3 Use intelligent postponement: Orders for rainbow boxes or pallets –a carton or pallet with an assortment of product rather than just one stock keeping unit (SKU) – are common. For customers who order assorted packs in a large volume, Hale suggests designing a process to create some assortments ahead of time, but at a rate slightly below typical orders. The balance can be processed when the customer actually places an order.
4 Design value-added operations as you would a production process: Although value-added services are performed in a DC, they have more in common with the manufacturing floor than typical pick and pack operations. "We urge customers to look outside their four walls for engineers who understand manufacturing, rather than warehousing, to design their value-added processes," says Hale.
5 If possible, use your WMS: Older warehouse management systems weren't designed with value-added process capabilities, but many newer systems do include modules for value-added services. "Whenever possible, you want to create a process that can be managed in a WMS like any other process in your operation," says Hale. "That allows you to determine which supplies you need and how many labor hours to allocate to your orders."

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