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Limiting inventory and fulfillment models to unit costs does not reflect current practice at distributors. Storage and material handling costs are appropriately incurred at the pallet level. Growing emphasis on accumulation and repalletization of customer partial pallet order quantities necessitates consideration of the costs of pallet splitting and case picking. Each cost category may contribute to expensive inefficiencies at a distributor. We describe these inefficiencies and suggest their use in developing customer cost premiums.
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INTRODUCTION
According to Supply Chain Digest, warehousing contributed over 30% of surveyed companies' logistics cost in 2015, and over half of warehouse labor expenses stem from picking, packing, and shipping outbound orders. As companies strive to adopt more efficient operations, orders placed with distributors continue to be for smaller and smaller quantities (Richards 2011), and labor costs for order staging and repackaging grows (Wulfraat, 2013; Piasecki, 2000-2012). Competitive responsiveness to customers leads to such activities as customized packaging or palletization, which must be integrated into the already expensive order-picking process (Van Hoek, 2001; De Koster et al., 2007).
Within a warehouse, product is typically stored on pallets, with order pickers using lift trucks to transport pallets from pallet racks and to a staging area (Piasecki, 2000-2012). Using pallets is beneficial to distributors for a number of reasons. Pallets can be moved more quickly than can individual case units, allowing for higher productivity of in-warehouse transport equipment. Use of lift trucks reduces the need for manual handling of inventory and, hence, less risk of worker injury or product damage (Ackerman, 1997; LeBlanc, 2013). Ordering and/or shipping in full pallets makes loading and unloading of trucks cheaper, easier and faster, for both distributor and customer (Kulwiec, 1985).
While the customer still benefits from having individual cases of product picked and stacked onto a pallet, these benefits are lost to the distributor when orders are not in full pallet quantities.
Typically, research on order quantities focuses on the customer: determining optimal order sizes given ordering, holding, and shortage costs. Existing research does not appear to study the impact of customer partial pallet order quantities on the costs at the distributor. Research focusing on the distributor pertains to warehouse design, storage methods, route optimization, order collecting, picking zones, etc....