Cross Docking Strategy

INTRODUCTION

Recent attempts to improve the efficiency of supply chains have focused on inventory-related costs, with a considerable amount of attention given to the amount of time inventory spends in the supply chain. Because of the amount of cash tied up in inventory, moving products quickly throughout the supply chain is often an important managerial objective. One strategy that has emerged to reduce the time inventory spends in the supply chain is cross-docking. Cross-docking accelerates inventory flow by receiving products at an inbound dock and immediately moving them "crossdock" for outbound shipment to customers. In the case of Wal-Mart, for example, it is well documented that cross-docking is a key driver of the company's superior customer service (Hammer 2004).

There are several different approaches to the use of cross-docking, and each approach has its own requirements and impacts on manufacturers, distributors and customers. For example, there are hub and spoke arrangements, where materials are brought to one central location and then sorted for delivery to several destinations; consolidation arrangements, where a variety of smaller shipments are combined into one larger shipment for economy of transport; and deconsolidation arrangements (or "break-bulk warehouses" (Apte and Viswanathan 2000)), where large shipments are broken down into smaller lots for ease of delivery, often involving a change in conveyance from the inbound shipment. In this paper we focus on this final use of cross-docking, specifically the case where truck load (TL) shipments containing multiple orders are split into smaller quantities for delivery to individual customer sites using less-than-truckload (LTL) carriers.

Cross-docking can offer tremendous value because it has the potential to eliminate both storing and picking, two of the most expensive operations in traditional warehousing. Reducing product storage can increase inventory turns, thus reducing inventory carrying costs and speeding the flow of products to the customer. Less inventory can also mean less space, equipment, and labor required for handling and storing the products, as well as a reduced risk of product damages and obsolescence.

While the benefits of cross-docking make it an attractive option for supply chain managers, the operating conditions under which it is most beneficial are not always clear. Apte and Viswanathan (2000) note that proper planning and management tools are necessary in order to realize the benefits of cross-docking. Numerous considerations have to be examined to determine when cross-docking makes sense given the available shipping alternatives, and models used to support this decision must represent the relevant costs accurately. In this paper we develop a model that allows us to gain insights into the situations in which cross-docking provides the most value for supply chain managers.

Our research is motivated by experience and discussions with supply chain managers at one of the leading chemical manufacturers in the world. With annual sales exceeding one billion dollars, its branded products are sold in consumer and industrial markets through a variety of channels, including mass merchandisers such as Wal-Mart, Lowes, and Home Depot. In the consumer products division that we studied, this firm sells over 500 standard and specialty products in highly competitive markets. While the firm and its customers acknowledge the benefits of cross-docking, the conditions under which it is preferable to direct TL shipments are not well established. We examine supply chain problems motivated by the real-world decisions faced by this firm, with the goal of assisting supply chain managers in their decisions regarding the use of cross-docking. Our formulation of the problem includes several key characteristics:

i. Accurate LTL costs - in practice, LTL costs often follow a modified all-unit discount cost structure. We use this complex shipping cost function for the LTL shipments in our model,

ii. Lumpy demand - we investigate the impact of several levels of demand "lumpiness," or variation, on cross-docking value.

iii. Inventory costs - since TL shipments are likely to increase the quantity of products stored at the customer sites, we include these storage costs in our decision model

In the following sections, we:

* Provide an overview of the related literature and present our research questions.

* Describe an example of a multi-echelon supply chain with cross-docking that captures the important features of the approach and provides the basis for our investigation of its value.

* Introduce an integer programming formulation to minimize the costs in the supply chain and discuss the conditions under which it will be evaluated.

* Present our computational results and the managerial insights that they provide for the cross-docking decision.

RELATED LITERATURE AND RESEARCH QUESTIONS

In this section we review previous academic work in the cross-docking area and present the research questions that we will investigate in this study. The questions are designed to analyze the value of cross-docking in different business environments, specifically addressing the role of demand patterns and holding costs on the benefits of cross-docking as a supply chain strategy.

AN INVESTIGATION OF THE VALUE OF CROSS-DOCKING FOR SUPPLY CHAIN MANAGEMENT, Journal of Business Logistics, 2008
by Galbreth, Michael R, Hill, James A, Handley, Sean

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