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Value-added service centers: altering inventory to customer specs.

From vendor managed inventory practices to the addition of labels and tags to garments, value-added services come in different forms and require various levels of commitment.

Value-added service may be a simple concept, but there are multiple definitions.

"It's adding any service to the product between the manufacturer and the retailer," says Jim Penn, partner in charge of distribution operations at Coopers & Lybrand. "And it's being able to provide that service to your customer at a compressed cycle time without increasing the customer's cost."

"I think of value-added service as product re-configuration," says Hugh Kinney of Logistics Resources International. "Any time I change the configuration of a product in some way, I've added value for the customer. That could mean something as simple as receiving separate pallet loads of blue, white, and red shirts from a manufacturer, and then sending them back out to individual retail outlets as individual pallets each with an assortment of blue, white, and red shirts."

"Value-added means performing a task that is beneficial to downstream supply chain operations," says John A. White III of Andersen Consulting. "While the converse is also true, we also want to minimize tasks that are not value-added."

In fact, value-added centers are all of the above. The best companies utilizing a value-added strategy have determined the cost of each step in the supply chain between the manufacturer and the end user of a product. They have also asked: Which of those steps can this facility perform, and which could be done more efficiently by someone else? The someone else may be the manufacturer, the distributor, or a third party. Those new steps add value to the product.

Traditionally, the demand for value-added services has come from the end user of the product. "You can almost say the customer is dictating a lot of these things," says Kinney. "The customer is demanding that you take this work off their hands. If you're the middle man in the supply chain, you're probably being squeezed pretty hard."

The demand for value-added services has already opened the door and will continue to open the door for more third-party distributors such as DSMI, a Charlotte, N.C., company. DSMI performs a variety of services for retail department store chains up to and sometimes including transportation services. By specializing in value-added services, such a third-party distributor can create a system that is more efficient and consistent than retailers can typically provide on their own.

"Taking value-added services outside of the store cuts down on the cycle time to the store shelf, and ensures the retailer a consistent presentation to the consumer," says Penn. "That's why you always see your shirts displayed the same way at the Polo Shop in Macy's. It's a service that allows one store to differentiate themselves from their competitors."

Value-added services make their own demands on a warehouse and distribution center. Rather than having a high percentage of permanent storage space, a value-added center will have a significant amount of space devoted to temporary storage, staging, and work stations. Along with lift trucks, conveyors and sortation equipment, expect to see packaging, printing, and labeling equipment widely used in value-added service centers.

Typically, value-added centers rely on warehouse management software and a flow-through warehousing strategy to manage the high volumes of product. Approximately 40 trucks visit DSMI's facility each day, but most of that product is unloaded, sorted, tagged, and rerouted to individual stores in less than 48 hours.

The practice is well established in the retail field. Chain stores now routinely look to their suppliers to make their products shelf-ready by adding price tags, poly bags, clothes hangers, or display materials.

But as the demand for value-added services grows, so do the different forms they take. For instance, manufacturers may turn to third parties to reconfigure or repackage bulk shipments of their product.

Frito-Lay ships bulk pallet loads of its snack products to a third party distributor in Georgia. That company then creates specialty variety packs of different flavors of chips for store display. The variety packs carry a new SKU.

Some manufacturers are turning to third party distributors to handle their returns.

"You buy a product, you don't want it, so you return it," says Kinney. "But instead of sending it to the company from whom you bought it, the product goes to a third party processor, who provides this service for the manufacturer." The return center then repackages the product so it can go back on the retail shelf someplace else, or if damaged, finds the most profitable way to resell it.

Health-care suppliers are currently seeing increased emphasis on value-added service centers.

Hospitals, in particular, are turning to their wholesale suppliers to manage the inventory in their store rooms. The supplier assembles commonly used items into kits, which are tracked by bar codes. When a nurse or orderly removes a kit from the shelf, it's scanned before delivery to the patient, updating the inventory records in real time. At the end of the day, or even the end of a shift, the supplier replenishes the stock room shelves.

Just as value-added services differ, so do the materials handling schemes required.

At McKesson U.S. Healthcare, pickers use wearable scanners while filling orders of pharmaceuticals and health and beauty aids to chains, hospitals, and independent retailers. After a tote contains all items in an order, the worker adds a sheaf of store price labels for the order, and scans each tote's shipping label and a header bar code on the label to confirm that the order is correct.

Rather than turn to a third party, mail order giant Lillian Vernon has created an in-house value-added service center within the company's Virginia Beach, Va., distribution center.

While other mail order firms are just beginning to talk about strategies such as make-to-order, Lillian Vernon has made a name for itself offering personalized gifts. For no additional cost to the customer, their names, initials or even corporate logos can be added to a seemingly endless variety of items, from bean bag chairs to T-shirts.

Lillian Vernon's challenge, then, was to design a system that permitted it to add this value to its products without adding exorbitant cost to the product. The company came up with a simple strategy whereby personalized items are processed in advance, then seamlessly merged into a conventional pick/pack operation that adds less than one day to the order filling cycle.

Items that require personalization are batched by SKU, picked in 1 hour waves, and sent to the appropriate mezzanine-level work area for engraving, monogramming, and related services. Finished items are then staged in totes in a bank of flow racks. Using a cart, order pickers fulfill orders in batches of 16 at a time, scanning the bar code on each item as it is picked. Completed orders are checked, packed, and sorted by shipping destination via a tilt tray sortation system. For a visual look at the flow of items see the artwork.

While consultants may disagree on how the value-added concept will evolve in the next millennium, most agree the demand for value added services will continue to expand as companies look for new ways to add value to their bottom line.

"There is no question in my mind but that you're going to see more and more requirements being placed on suppliers to do more and more things," says Kinney. "The demand for value-added services will only grow and grow."


Operational characteristics:

* Storage of genetic inventory

* Manual and mechanized materials handling

* Staging of inventory

* Extensive piece work at individual workstations

* Addition of customs labels and tags to individual items

* Repackaging of inventory to customer specifications

Prominent technologies:

* Traditional materials handling equipment including lift trucks, racks, carts, workstations, and conveyors

* Customs packaging materials

* High-performance bar code label and tag printers

* Electronic data interchange
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Title Annotation:Planning for the Millenium
Publication:Modern Materials Handling
Article Type:Cover Story
Date:May 15, 1998
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