Slotting ROI: Tangibles and intangibles

This is a brief rundown of possible benefits of slotting and its impact on several operational factors, from different sources and our own experience.
Some warehouses with few SKUs and trivial order lists may not need slotting at all. The larger and more complex a warehouse becomes, the more slotting will have an impact. Ranges of % in benefits are for typical warehouses, but can vary from 0% – to even more than what is stated. Values are extremely dependent on several interacting aspects of warehousing, most significantly: order profiles, diversity of SKUs, geometry of warehouse, the existing layout and slotting procedure.

Pre-Slotting

Layout:
For warehouses using many different products, mixing several storage systems becomes more cost-effective than using only one type of storage. However, rule-of-thumb systems are difficult to size and results can be far from the optimized solution, with productivity impacts up to 30-40% on replenishments and picking.
The optimal balance between types of racking can be determined using specialized software, evaluating the relative needs for replenishment, picking rates, space, flow-rack cost, etc.

Space Maximization:
Pre-slotting determines the optimal quantities and storage types for products based on their order profiles. This maximizes the warehouse cube, thereby cutting the square footage requirements with possible space savings in the 35% – 43% range.

References:
– Bartholdi and Hackman, Warehouse & Distribution Science 2010
– Avery, Operations and Fulfillment, July 1999

Dynamic Slotting

Typically, static slotting for distance and velocity alone can reduce labor cost by 10%. Further savings of 5% can be achieved by using batch picking and product family grouping. Dynamic slotting uses floating-pick storage spaces, and uses specific-period strategies instead of product life-cycle strategies. Receiving and put-away are directed moves to specific locations. This results in sustained productivity, with measurable savings in operational costs from fixed slotting.

Space Utilization:  minimize allocated free space because of adjustable assigned volumes.

Put-Away: Directed put-away reduces guesswork and eliminate errors, and removes the need to search the warehouse for locations.

Replenishment: Synchronizing stock replenishment and space allocation can significantly reduce the number of stockouts, a time-consuming problem for high-throughput distribution centers. A case study showed results of up to 77% less stockouts.

Picking Efficiency:
Results indicate that order fulfillment time can be reduced by 20%. Using an optimal combination of picking policy (good slotting may optimize batch picking strategy); up to 50% in labor savings from traditional strategies can be reached.

Order completion and shipping: reduce management and order completion time, as picking is optimized.

Some Intangibles:
Many aspects of warehouse operations will experience reduced pressure because of smart slotting:
– put-away management
– order picking management
– shipping management
– improvements in key metrics (KPIs): picks per hour, cycle times, inventory turns, order accuracy, order checking.
– enhanced work environment and safety (ex.: high velocity items in safe locations)
– fewer material damages (less distance traveled, less material relocation and handling)
– equipment wear

References:
[Petersen CG, Aase G, Int. J. of Production Economics, 2004]
[Launders, IIE Transactions, August 1996]  37% improvement cited
[Frazelle, 1990] 20-50% improvement in picking time.
[X.He , SP Sethi , J Optim. Appl. 2008ç
[Gagliardi, Ruiz, Renaud, 2008] 77% stockouts

Conclusion:

Slotting has an impact on all of warehouse operations and KPIs: productivity, shipping, inventory, stocking, order cycle, storage. The typical distribution of cost in warehouse operations is [Frazelle, 2002]:
–    Order Picking: 50%
–    Shipping: 15%
–    Receiving: 15%
–    Storage: 20%
Adding the savings from all operations, it is a reasonable assumption that dynamic slotting will provide 10 to 30% cost reduction from a baseline operation.

Studies suggest that in a typical warehouse, less than 15% of SKUs are properly slotted. Once fully slotted, most warehouses would save 10 to 30% on operations. For a medium size distribution center with several thousands of SKUs, simulations also show 20% savings in total labor cost. Examples of 100% improvement in both productivity and response time have been reported. Given that planning cost and establishing a slotting strategy is minimal in capital investment and risk, this is a most profitable ROI.

Possible improvement on Warehouse KPIs:
–    Picking rate: 20-50%
–    Order completion time: 25%
–    Storage efficiency: 0-30%
–    Equipment usage cost: 25%
–    Material damage: 25%
–    Space utilization: 5-40%

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