Role of ABC Analysis in the Process of Efficient Order Fulfillment:

Case Study

Syed Abdul Rehman Khan1, a*,Dong Qianli2,b and Yu Zhang3,c

1
School of Economics and Management, Changan University, China
2
Department of Logistics and Supply Chain Management, Changan University, China
3
School of Economics and Management, Changan University, China
a
sarehman_cscp@yahoo.com, b312129015@qq.com, c984730042@qq.com

Keywords: Warehouse; Delivery lead-time; Engineer-to-order; Make-to-order

Abstract:
In todays world, every company is competing to enhance its time-based competitiveness.
The time to complete the all activities of the order cycle is the significantly important part of
customer service. Accurate and fast order processing is a hallmark of high quality of service. This
paper addresses the most time-consuming and costly factor of the ordering processorder filling.
According to the some researchers, order filling is composed of the physical activities needed to:
acquire products through stock retrieval, purchasing or manufacturing; pack the product for
consignments; schedule the consignment for delivery; and prepare shipping documentation.
Usually this series of activities in the order-filling process takes place in the warehouses, making
them a central part of a company system of logistics. This paper is based on a case study to identify
how some simple approaches build in theory can be applied to the firms current practice to
enhance the order-filling process. Specifically, a short plan consisting of ABC analysis and
relocation of current positions of inventory is tested, and a long-term plan for redesigning the
layout of warehouse is proposed.

Introduction:

In todays world each and every company want to grow fast, and success and achievements
of company are attached with the customer satisfaction. However if customers are happy with the
services provided by firms, so ultimately they keep buying process continue with company, but if
company failed to provide highest or better customer service so customers try to find another
alternative way (company) from where he can get better services. If we talk about customer
services so in the chain of supply, we cannot ignore to the order filling process, because if customer
give order to the firm, so company start order filling process. Order fulfillment process starts from
the orders received from customer till orders delivered to the customers as per requirements.
Ordering filing is the physical activities of the following steps; acquire items through (from side
to side) stock retrieval, pack to these items for the shipments, schedule the successful delivery and
finalize the shipping documents. Ballou, R.H (1999). Usually these activities are done in the
warehouses. The first research on order filling published by Mather, (1988), in Mathers research
discussion of P.D Ratio, where P = Production lead time and D= Demand lead time, and customers
can wait how long, based on comparing Ratio of P.D. Usually firms has following order filling
option.

Figure: 1.1: Manufacturing Strategies and Lead Times

Delivery Lead Time

Engineer
Design Purchase Manufacture Assembly Ship to Order

Delivery Lead Time

Make to
Inventory Manufacture Assembly Ship Order

Delivery Lead Time

Assembly
Manufacture Inventory Assembly Ship to Order

Delivery Lead
Time

Make to
Manufacture Inventory Assembly Ship Stock
ETO (Engineer to Order): usually this option is used for the special products, instruments, bridges,
constructions etc.
MTS (Make to Stock): In this approach products produced before receiving orders from the
customers, when customer orders come, they fulfill to the orders from finished goods stored.

MTO (Make to Order): In this strategy after receiving orders from customers products produce,
and usually in this strategy final orders are delivered to customer as per the customer specifications
like aircraft, expensive vehicles etc.

ATO (Assemble to Order): This approach is also called modular products architecture, Means
Company produced usually many parts in the modular shapes, but never assembled before the
customer orders. Whenever customers place an order then employees assembled to the products
as per the customer requirements.

There is no any doubt thats manufacturing strategies also creates direct impact over lead
time and order fulfillment process. Warehouse management has many aspects, but here in this
research one company problems has been analyzed and use some techniques which is developed
in theory has been applied over current practices of company and improve to the order filling cycle,
specially ABC analysis as well as relocation of the inventory area.

Company Background:

Lina & Kelly Established in 1981, Lina & Kelly was two sisters who started the business
together in the city of Tacloban, Philippine. On the initial stage they started the business with very
limited resources but after the passage of time these companies grow day by day. Lina & Kelly is
an industrial supplier caters to the almost all industrial related products including different machine
parts, valves, Pipes etc. Lina & Kelly was a medium-sized distributor of industrial related products,
and an annual sale of the company was $6.3 Million. And company has 21 employees and, and
company deal in almost 35000 items mainly lubricants, valves, Pipes & fitting etc. and price of
each item was different some items was very expensive and some was low price, company has all
the times $1.2 Million inventory on hand Company.

Role of the Warehouses:

In the modern supply chain management, the role of warehouses is very important. In
todays competitive world warehouses use not only for storage purpose, According to the
Higginson & Bookbinder, (2005) warehouses are using at many stages in the supply chain like raw
material warehouses, WIP (work in process) warehouses, Finished Goods warehouses,
Distribution warehouses, Fulfillment warehouses etc. as well in the modern supply chain
warehouses is also using for the value addition purposes the mainly for Cross-dock, Assembly
facility, product fulfillment, returned goods storage, transshipment facility, consolidation,
postponement, late configuration etc. Baker, (2004) a survey conducted in the United Kingdom
and as per the survey value added activities occurred 71% in the warehouses. Companies can
achieve the efficiency and effectiveness both by using the warehousing effectively. In this article
we will in-depth discuss to one distributors warehouse problems. Warehouses can only add a huge
cost in the supply chain or it can also add value. According to the Ecklund, D.K, (2010). The
fundamental purpose of the warehouses is to providing right products, right time, right place with
a low and competitive cost and also damage free. Usually selection the right location, design &
operation of the warehouses are very important, and location of the warehouse is depend on rates
of transportation, product characteristics, the level of service required, infrastructure, land &
building, policies of the government, labor rates and target market. Organizations management is
very conscious about the KPIs (Key Performance Indicators). The very common measurements
are warehouse utilization space, cycle time, accuracy, handling productivity, service level, cost
and inventory. Key distribution centers & warehousing metrics this survey conducted in 2010
by Dr. Manrodt, K. Georgia Southern University and Vitasek, K., Tillman, J., Consultancy Supply
Chain Vision. According to the survey senior management care about performance measurement
and in the surveys respondents the following was the top most popular measurements.
 Baker, (2004) usually warehouses 50% of the total area is given to inventory storage and
19% is for Picking & Packing the goods. Warehouse design is extremely important but No
theoretical or science based methodology exists for warehouse design Goetschalckx et al.,(2002),
Rouwenhorst et al.,( 2000), Baker & Canessa, (2009).

Table 1: Warehouse Metrics

Metric % Using
Customers Shipment on Time 85.8%
Order filling accuracy 73.2%
Avg. warehouse capacity used 70.4%
Annual Labor/ Employee turnover 60.2%
On time ready to ship 58.8%
Peak warehouse capacity used 58.7%
Fill rate-line 57.7%
Dock to stock cycle time (hour basis) 56.2%
Inventory count accuracy by location 53.0%
Order fill rate (Complete) 50.7%

Problem in Lina & Kellys Warehouse:

Lina & Kelly now became in the strong positions in last few years, and they was competing
with other distributors exists in the same markets. But the biggest problem which they was facing
is delay in the order fulfillment process, after receiving the orders from customers, they 08 to 14
hours approximately take in process of order fulfillment, but lina & Kellys competitor was more
faster in customer order fulfillment. Because of this problem, negative perceptions were
developing in the market about the companys customer service. As well customers were switching
towards other alternative. And senior management does not want to lose their goodwill and
reputation in the market. The basic purpose of this research was to find out reasons of delaying in
the process of order fulfillment. After the visit to the warehouse and discussion with the concerns
staff, firstly I felt problem is rack and shelving and inventory was not stored properly, many items
was stored randomly. Then i interviewed with the warehouse manager and ask some basic
questions regarding order fulfillment processes as well as I also observed thats warehouse staff
was well skilled, so ultimately major problem were with the racks, shelving units and storage area
of inventory. Means inventory was not stored on the right place, which creates problem during
picking, moving and packing of the material and many times waste because off finding the right
products on the right time. Lina & Kelly was greatly concerned with minimizing the needed time
for process an order, for the achieving the goal we have suggested the plan for improving the order
fulfillment time, so we recommended to use ABC analysis and first separate to the all inventories
as per the ABC categories and then relocate to the inventories as per ABC analysis.

ABC Analysis

One thing we have observed as per the data provided by the senior management, there are
many items in the warehouse, which sales on the quarter basis, half yearly, annually basis and also
some products sold in one or two times in last 5 years. So firstly we need to distinguish FMI (Fast
Moving Items) and SMI (Slow Moving Items) on the basis of ABC techniques. In this analysis
inventory distributed in three different categories and each category has different requirements
(Melnyk 1997). Usually ABC analysis can be by the inventory turnover in dollar or by the
inventory turnover in quantity. First we have separated to the inventories on the basis of monthly
usage and demand, so we categorized to the inventory in the following manner.

ABC Analysis On basis of Monthly Usage & Demand

A Category = 55%

B Category = 35%

C Category = 10%

These all ABC classification we have done as per the scenario of this specific warehouse
problem. So may here we did not use Thumb Rule of ABC analysis, for ensuring the better
results. As a results there were 150 A items, which is 55% of the total demand, 1405 B items,
which is 35% of the demand and the remaining 4265 was C items, which is the 10% of the demand.
And on the basis of these analysis, A category Items should be stored nearest area from picking
and shipping, and then B category items and in the last C category items (far from the shipping
and picking area). And finally and this plan then we was ready to implement this plan for pilot
testing, so after few difficulties we have moved to the inventories on the basis of ABC analysis.
First we have found out the best optimal places for the A category and B category in relation
to nearest point from the shipping and receiving area. One thing which we noticed during the
relocation of the inventories, specially A and B items were not stored before in the suitable
(receiving and shipping) places. That was the major problem of delaying in the process of order
fulfillment time. Because right products were not on the right places (near from receiving and
shipping area) and it were creating hurdles for the warehouse labor in the finding the right material
in the right time and quickly.

After the relocating inventory, now an A Category products was nearest from shipping area, to
picked products quickly and with fewer difficulties. And then on the second immediate spot B
products were stored and then C category products (in the remaining available place). After these
all changes, we also conducted one timing test to check now, how long it takes in retrieval of the
same products from the new location as well from the old location.
Figure 1.2: The Warehouses Layout & Inventory Storage

Old Location of the Products without ABC Analysis Techniques

New Location of the Products with ABC Analysis Techniques

 As first we choose 8 Items from A Category, 10 Items from the B Category and then
12 Items from C category. After random selection the items we used one simulating test same
like an actual orders receipt from customer, including receiving the orders, finding the products
and delivering it to the shipping concerns. And these steps first did with old inventory location
and same test we did again with the new inventory location. We have seen really amazing results
only because of ABC analysis and right inventory on the right place many products retrieval
time has been minimized successfully.

Table 2: Products Retrieval Time

Avg. Avg.
Product % Picking Picking Saved
S. No Old Location New Location
Categories Time in Time in Time
Seconds Seconds
1 A Near office Room 96 Aisle 5 & 6 55 -41
2 A Aisle 10 85 Aisle 5 & 6 46 -39
3 A Aisle 8 82 Aisle 5 & 6 41 -41
4 A Near office Room 185 Aisle 5 & 6 39 -146
5 A 55% Aisle 1 118 Aisle 5 & 6 43 -75
6 A Aisle 9 124 Aisle 5 & 6 51 -73
7 A Aisle 1 148 Aisle 5 & 6 49 -99
8 A Aisle 2 61 Aisle 5 & 6 47 -14
1 B Aisle 7 85 Aisle 1, 2, 3, & 4 57 -28
2 B Aisle 6 73 Aisle 1, 2, 3, & 4 130 57
3 B Aisle 10 76 Aisle 1, 2, 3, & 4 61 -15
4 B 3rd Floor 246 Aisle 1, 2, 3, & 4 86 -160
5 B 35% Aisle 8 64 Aisle 1, 2, 3, & 4 61 -3
6 B Aisle 5 105 Aisle 1, 2, 3, & 4 91 -14
7 B Aisle 3 210 Aisle 1, 2, 3, & 4 106 -104
8 B 3rd Floor 315 Aisle 1, 2, 3, & 4 96 -219
9 B Aisle 6 51 Aisle 1, 2, 3, & 4 91 40
10 B Aisle 5 79 Aisle 1, 2, 3, & 4 81 2
1 C Aisle 9 68 Aisle 7, 8, 9 & 10 43 -25
2 C Aisle 3 97 Aisle 7, 8, 9 & 10 71 -26
3 C Aisle 2 235 Aisle 7, 8, 9 & 10 141 -94
4 C Aisle 5 246 Aisle 7, 8, 9 & 10 394 148
5 C Aisle 6 81 Aisle 7, 8, 9 & 10 96 15
6 C Aisle 1 23 Aisle 7, 8, 9 & 10 35 12
7 C Aisle 7 83 Aisle 7, 8, 9 & 10 77 -6
8 C 10% 2nd Floor 412 Aisle 7, 8, 9 & 10 209 -203
9 C Near Office Room 318 Aisle 7, 8, 9 & 10 119 -199
10 C Near Office Room 345 Aisle 7, 8, 9 & 10 148 -197
 11 C 2nd Floor 485 Aisle 7, 8, 9 & 10 186 -299
12 C Near Office Room 519 Aisle 7, 8, 9 & 10 120 -399

In the above table simply represents retrieval time from the old inventory location and
from the new inventory location thats just because of relocation of the inventory can lead
significance time reduction in accessing the products specially A category and B category
and few items of C category also. These changing in the relocation of the inventory lead to the
amazing results in Timed saved during the order finding & picking item (randomly). It is really
amazing, just because of ABC analysis and properly storage to the right inventory on the right
place can dramatically minimize the order fulfillment process time

Conclusion & Future Research

There are no any doubt the warehouses play a vital role in the effective customer services.
Specially fulfilling the right customer right order and on right time delivery. This paper is based
on case study of Lina & Kelly distributor located in Tacloban, Philippines. And in this article we
have used ABC analysis techniques to reducing the customers order fulfilling time. And after the
successful pilot testing, company has implemented this plan in all warehouses successfully. Every
research has some limitation of resources, time and other factors; usually it is difficult for the
researchers to cover all aspect of any topic in the limited time & resources. Future researcher can
do more research on order fulfillment in the new market with new aspects.

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