Chapter 2. Theoretical Foundation. In chapter 2 we will discuss more about the theoretical foundation that uses in the thesis.

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1 5 Chapter 2 Theoretical Foundation In chapter 2 we will discuss more about the theoretical foundation that uses in the thesis. This chapter functions as the foundation theory to support finding the solution of the problem that is identified in the chapter 1. The main theories that will be used in this chapter are about supply chain management and warehousing management system. These theories are essential to become core knowledge to developing the thesis. 2.1 Business Efficiency Business efficiency is a situation in which an organization maximizes benefit and profit, while minimizing effort and expenditure. Maximization of business efficiency is a balance between two extremes. If a company can manage their business efficiency correctly, it can reduce costs, waste, and duplication [1]. The other definition of business efficiency is measure of productivity relative to the input of human and other resources. Initially a measure of the effectiveness of a machine in terms of the ratio of work output to energy input [2]. 2.2 Warehouse Management System In this section the author will stress more about warehouse management system. Before talking about warehouse management system, first we should know the definition of a warehouse is warehouse is a place to store goods or merchandise [3], while management is the act of treating, directing, carrying on, or using for a purpose [4], and for system, the definition is a set of detail methods and routines

2 6 that created or formulated to perform a specific activity or duty, and to solve a problem [5]. After knowing the definition of warehouse, management, and system, now the author will discuss more about the definition of warehouse management system. According to Dave Piaceski, A warehouse management system (WMS) is a software application that supports the day-to-day operations in a warehouse [6]. On the other hand Texas Warehouse association defines warehouse management system as software to manage inventories [7]. And Wikipedia define warehouse management system, or WMS, as a key part of the supply chain and primarily aims to control the movement and storage of materials within a warehouse and process the associated transactions, including shipping, receiving, putaway and picking [8]. From the definition above, the author conclude that Warehouse management system is a software application that control warehouse operational flow including movement and storage of materials and process related warehouse transactions Technology that are use in the Warehouse Management System. There are several technologies that are going to be used in a warehouse when companies implementing warehouse management system to optimize their business process. Those technologies are: Radio Frequency Identification (RFID) Radio Frequency Identification (RFID) is the use of an object (typically referred to as an RFID tag) applied to or incorporated into a product, animal, or person for the purpose of identification and tracking using radio

3 7 waves. Some tags can be read from several meters away and beyond the line of sight of the reader. Most RFID tags contain at least two parts. One is an integrated circuit for storing and processing information, modulating and demodulating a radiofrequency (RF) signal, and other specialized functions. The second is an antenna for receiving and transmitting the signal. There are generally three types of RFID tags: active RFID tags, which contain a battery and can transmit signals autonomously, passive RFID tags, which have no battery and require an external source to provoke signal transmission, and battery assisted passive (BAP) RFID tags, which require an external source to wake up but have significant higher forward link capability providing greater range [9]. Barcode A barcode is an optical machine-readable representation of data, which shows certain data on certain products. Originally, barcodes represented data in the widths (lines) and the spacing of parallel lines, and may be referred to as linear or 1D (1 dimensional) barcodes or symbols. They also come in patterns of squares, dots, hexagons and other geometric patterns within images termed 2D (2 dimensional) matrix codes or symbols. Although 2D systems use symbols other than bars, they are generally referred to as barcodes as well. Barcodes can be read by optical scanners called barcode readers, or scanned from an image by special software [10].

4 8 EDI (Electronic Data Interchange) EDI or Electronic Data Interchange is a standardized system for transferring data between different computer systems or computer networks [11]. EDI is commonly used in a business that required repetitive manual tasks to support a business. EDI will change those tasks by simply eradicates them by automating the process and remove paperwork element. EDI will increase accuracy in those processes by eliminating the re-keying of data. Then the quality of those data is enhanced by agreeing product codes, prices and location codes in advanced. EDI can reduce the supply chain cost that related with manual processing. This will help the company to strengthen customer or supplier partnerships [12]. Wireless Network Wireless network refers to any type of computer network that is wireless, and is commonly associated with a telecommunications network whose interconnections between nodes is implemented without the use of wires. Wireless telecommunications networks are generally implemented with some type of remote information transmission system that uses electromagnetic waves, such as radio waves, for the carrier and this implementation usually takes place at the physical level or "layer" of the network [13].

5 9 Figure 2.1 Big Pictures of WMS Things To Consider When Choosing WMS Supplier: Robust Standard Functionality Custom software is expensive, risky and typically unnecessary. Strong consideration should be given to the prospective WMS supplier that requires the fewest number of modifications to their base software [14]. Proven Track Record It is obviously important for the selected WMS supplier to have the necessary software code. It is equally important, however, to have the resources, tools and methodology required to successfully implementing their system into an existing operation. There is no better way to demonstrate this capability than through a long list of happy clients [14].

6 10 Industry Knowledge Most software evolves over time. Customers request and pay for modifications that then become standard functionality. Future customers benefit from those system enhancements. By selecting a WMS supplier with recent experience in the target industry, it is often possible to minimize customization.it is also critical that the selected WMS supplier have a thorough understanding of the client's business. By selecting a supplier with prior experience in the industry, the discovery process can be shortened and the supplier's knowledge can be leveraged to arrive at a superior solution [14]. Solid Financials Requirements change. The WMS will have to be modified and upgraded over time to keep up with those changes. Every effort should be made to ensure that the selected supplier would be in business for the life of the system [14]. Total Cost of Ownership When considering the cost of a WMS, the price of the software is just part of the picture. The total cost of ownership over five years is typically two to five times the installed software price. Other factors to be considered include [14]: + Hardware + System Integration + System Maintenance / Upgrades

7 11 + Escrowed Source Code + Change Orders Key Benefits of Using WMS Speed Up Order Handling Process [15]. Ensure Transparent and Accurate Inventory Data [15]. Optimize Your Warehouse Layout and Space Utilization [15]. FIFO Implementation [15]. Automated Data Collection [16]. Cycle Counting [16]. 2.3 Third Party Logistics Third party logistics is one of the elements of a supply chain. Many factories already trust third party Logistics Company to handle their freight distribution process. Before the author explains about third party Logistics Company in detail, first the author would discuss about the definition of Third Party Logistics Company. According to council of supply chain management professionals, Third Party Logistics Company is a firm [that] provides multiple logistics services for use by customers. Preferably, these services are integrated, or bundled together, by the provider. Among the services 3PLs provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding [17]. While according to Coyle, Bardi and Langley, Third Party Logistics Company is external supplier that performs all or part of a company s logistics function [18].

8 12 And Eric Goh See Khai defines third party Logistics Company as a supply chain practice where one or more logistics functions of a firm are outsourced to a 3PL provider [19]. From those definitions the authors conclude that third Party Logistics Company or so called 3PL or TPL is an outsource logistics service provider that handle one logistics service or a packet of service that covered the entire supply chain management. Logistics functions that usually handle by 3PL Company are: distribution, transportation, warehousing, inventory order fulfillment, and management of distribution goods to the client s customer. The 3PL company uses their own resources and assets when they are perform those logistics function. Figure 2.2 Pictures of 3PL Distribution Flow

9 PL application process 3PL application process can be done in several stages, which are: Awareness In the awareness stage, a company must know about their business situation. Usually in this stage their creating SWOT analysis for their business [19]. Market Research In Market Research stage a company investigating about the trends of the current target market in various service demand. In this stage usually they are creating a Customer Satisfaction Model and Quality Function Deployment [19]. Strategy In Strategy stage a company should expand their logistics concepts regarding to their business target [19]. Make or Buy In Make or Buy stage, the company should identify whether they want to create their own competence or they are willing to outsource it. If they decided to do outsourcing, they also should consider whether they want to outsource it completely or partly [19]. Business Plan After they done all the stages above then they are entering the business plan stage, in this stage they starting to create a business plan [19].

10 14 Selection After finishing the Business Plan stage, they enter selection stage. In this stage a business owner can select a partner based on their consideration. For example: based on the partner market coverage, partner competency, partner integrity, etc [19]. Agreement In the agreement stage, business owner should set the mutual expectation with their partners by creating sets of performance metrics [19]. Evaluation and Renewal In the last stage, Evaluation and Renewal, the business owners maintain the partnership via several characteristics, such as: mutual financial cost and benefits, joined planning, multi-level contacts, open information exchange, etc [19] Advantages using 3PL company When a company decided to use service from 3PL Company to manage their supply chain, there are several benefits that the company can get, which are: A company can focus more on broadening their core business [19]. It can help to improved company s operational efficiency [19]. The inventory cost can be reducing due to better inventory management [20]. Shorter shipment period can lead to the improvement of customer service [20].

11 15 Shipment visibilities are increased [21]. More broadening logistics operation [21]. Technology and service enhancement [21]. It can reduce company s risk [22]. It also can reduce company s capital expenditures [22] Disadvantages using 3PL With so many advantages that a company can get by using 3PL service provider, there are also some disadvantages that a company should consider. Those disadvantages are mention as follow: Possibility in employees job lost [19]. Occurrence of breakdown self-esteem among the employees [19]. The company will lose ability to perform physical count in the event of disagreement [22]. The company may not be able to confirm the freight shipping dates to their customer [22]. The company will have no control on the daily issue [23]. The company will have less contact to the customer [23]. Possibility of discontinuity of services from the 3PL service provider [23]. 2.4 Supply Chain Management Bozarth and Handfield defines supply chain as a network of manufacturers and service providers that work together to convert and move goods from the raw

12 16 materials stage through to the end user [24]. And for the supply chain management, Bozarth and Handfield defines it as the active management of supply chain activities and relationships in order to maximize customer value and achieve a sustainable competitive advantage [24]. While Coyle, Bardi, and Langley defines supply chain management as a network of logistics systems and related activities of all the individual companies or organizations that are a part of a particular supply chain [18]. On the other hand, Harlan defines supply chain management as a management of a network of interconnected business involved in the ultimate provision of product and service packages required by end customers [25]. Therefore supply chain management is a network of many businesses that works together to produce then delivered products to the end users. Supply chain management involves many industries that supplying the raw material, producing the goods, and delivering the goods to the end users and all of those industries are connecting each other. These industries are work together in order to improving gain profits. Figure 2.3 SCM Concepts

13 Components of SCM According to Martin Murray, a supply chain was created from several elements that are connecting each other by the movement of products along it. Those elements are [26]: Customer: The customer starts the chain of events when they decide to purchase a product that has been offered for sale by a company. The customer contacts the sales department of the company, which enters the sales order for a specific quantity to be delivered on a specific date. If the product has to be manufactured, the sales order will include a requirement that needs to be fulfilled by the production facility. Planning: The requirement triggered by the customer s sales order will be combined with other orders. The planning department will create a production plan to produce the products to fulfill the customer s orders. To manufacture the products the company will then have to purchase the raw materials needed. Purchasing: The purchasing department receives a list of raw materials and services required by the production department to complete the customer s orders. The purchasing department sends purchase orders to selected suppliers to deliver the necessary raw materials to the manufacturing site on the required date. Inventory: The raw materials are received from the suppliers, checked for quality and accuracy and moved into the warehouse. The supplier will then

14 18 send an invoice to the company for the items they delivered. The raw materials are stored until the production department requires them. Production: Based on a production plan, the raw materials are moved inventory to the production area. The finished products ordered by the customer are manufactured using the raw materials purchased from suppliers. After the items have been completed and tested, they are stored back in the warehouse prior to delivery to the customer. Transportation: When the finished product arrives in the warehouse, the shipping department determines the most efficient method to ship the products so that they are delivered on or before the date specified by the customer. When the customer receives the goods, the company will send an invoice for the delivered products. According to Thomas Wailgum, there are five basic components of supply chain management, which are [27]: Plan This is the strategic portion of SCM. Companies need a strategy for managing all the resources that go toward meeting customer demand for their product or service. A big piece of SCM planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers. Source Next, companies must choose suppliers to deliver the goods and services they need to create their product. Therefore, supply chain managers must develop a set of pricing, delivery and payment processes with suppliers and create metrics for monitoring and improving the

15 19 relationships. And then, SCM managers can put together processes for managing their goods and services inventory, including receiving and verifying shipments, transferring them to the manufacturing facilities and authorizing supplier payments. Make This is the manufacturing step. Supply chain managers schedule the activities necessary for production, testing, packaging and preparation for delivery. This is the most metric-intensive portion of the supply chain one where companies are able to measure quality levels, production output and worker productivity. Deliver This is the part that many SCM insiders refer to as logistics, where companies coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers to get products to customers and set up an invoicing system to receive payments. Return This can be a problematic part of the supply chain for many companies. Supply chain planners have to create a responsive and flexible network for receiving defective and excess products back from their customers and supporting customers who have problems with delivered products Three levels of activities in supply chain management: According to Martin Murray in his articles, he defines there are three level of activities that a company would paying attention more on. This to make sure that their supply chain working as efficient as possible and generating the

16 20 highest level of customer satisfaction at the lowest cost. Those levels will mention as follow [26]: Strategic: At this level, company management will be looking to high level strategic decisions concerning the whole organization, such as the size and location of manufacturing sites, partnerships with suppliers, products to be manufactured and sales markets. Tactical: Tactical decisions focus on adopting measures that will produce cost benefits such as using industry best practices, developing a purchasing strategy with favored suppliers, working with logistics companies to develop cost effect transportation and developing warehouse strategies to reduce the cost of storing inventory. Operational: Decisions at this level are made each day in businesses that affect how the products move along the supply chain. Operational decisions involve making schedule changes to production, purchasing agreements with suppliers, taking orders from customers and moving products in the warehouse.

17 Figure 2.4 Levels of Activities in SCM 21