The old operational models in the order-fulfillment business, i.e., discreet, separated modules along the supply chain – separate operations of order management, warehouse management, and transportation management – are rapidly becoming obsolete given the communication and information management systems available due to digital communications, particularly the Internet.  Excess inventory, sluggish response times to orders, inflexibility in responding to variances in customer demand or outside supply of product, are all pitfalls which can now be avoided and significant cost savings enjoyed through an integration of these modules/processes.

The paper advocates a new model: a fully integrated process along the supply chain, a comprehensive combination of -- and communication between -- order management, warehouse management, and transportation management.  The paper proposes a ‘virtual warehouse’ (VW), in which processes at every stage in the supply chain are tracked and managed in real time, using sophisticated computer algorithms to track the status of any element in the process – the customer’s order in its various components, the company’s workers, the trucks or planes used to deliver supplies to the warehouse or deliver orders from the warehouse to the customer, the amount of inventory on hand at any given point, etc.  The status, quantity, and efficiency of any or all of the above components can be both monitored and adjusted in real-time using the VW model.

In order to test the VW model, the paper’s authors created a simulation to test their assumptions on a supply chain process used to deliver automobile engines, automobile tires, and motor oil to customers who ordered these items from any of a company’s 250 franchises, for example, an AutoZone auto parts store.  The integrated process was organized around “pull” – demand from consumers – instead of “push” – the need to react to inventory supply.  In addition, the VW implemented new processes for order fulfillment, instead of the typical old-fashioned paradigm of FIFO (First In, First Out.  To fulfill orders, the simulation utilized a variety of alternatives to FIFO, the most successful of which was a complex real-time algorithm known as Critical Ratio (CR), which for each order, calculated the ratio of the amount of time left before its due date to the amount of work left to be completed (i.e., processing time).  The job with the smallest ratio was automatically bumped up to the front of the order processing queue.

The results of the simulation were remarkable.   The integration of order management systems, warehouse management systems, and transportation management systems in to a virtual warehouse model processing orders with the CR algorithm resulted in dramatic improvements in supply chain efficiency and costs.  The costs to process orders for engines, tires, and motor oil dropped an amazing 20%, 48%, and 41% respectively.  The only down side, then, would be the cost of implementing the new virtual warehouse management system – a vast and complex task – as well as a slight increase in inventory housing costs.  However, the authors point out that the latter can be addressed by arbitrarily manipulating the algorithmic variables governing inventory levels.

In all, the paper makes convincing arguments both theoretically and empirically about the immense potential value of companies reforming their supply chain systems from top to bottom.  Lowered fulfillment costs and improved customer satisfaction are goals any company would want to achieve, and the virtual warehouse seems to be the way to do it.

BIBLIOGRAPHY

Mason, Scott J., Ribera, P. Mauricio, et al.  Integrating the Warehousing and Transportation Functions of the Supply Chain.  Global Concepts Inc., and the Logistics Institute at the University of Arkansas, Pergamon Press, 2003.