As a warehouse manager, is it your job to cut costs or to add value? You might answer that you do both, but which of the two do you do the best? Furthermore, which of the two is more important to your boss, to the client or to the consignees who are your client's customers?

Some background

Back in 1963 when 13 executives formed the professional group originally called the National Council of Physical Distribution Management (NCPDM), warehousing was usually supervised by an executive who was called "general traffic manager." It is my impression (and I was not there) that the Council's founders felt traffic managers should do more than just negotiate prices with carriers and public warehouses.

Traffic managers were perceived to be cost cutters. Although transportation in North America was largely regulated before 1980, the creative traffic executive could persuade carriers to publish special rates in return for increased volume. Warehousing was not regulated in most of the U.S., but a similar rate-cutting mentality dominated the conversations between traffic managers and their service providers.

The relatively new terminology of physical distribution was, in essence, the opportunity to expand the field of "moving stuff" beyond traffic management. In its early years, the Council leaders certainly looked at costs, but they also suggested the role of a physical distribution manager should include the enhancement of customer service and inventory management.

Because physical distribution typically was limited to finished products, the Council changed its name to replace physical distribution with the new term "logistics." The military definitions of logistics included the management of raw materials as well as finished goods.

After the turn of the century, the Council again changed its name to replace logistics with the still newer term "supply chain management." Throughout this process, the role of the supply chain executive was constantly expanding.

Which comes first?

The unanswered question is whether contemporary supply chain managers spend most of their time cutting costs or adding value. If you were to ask chief executives in manufacturing, retailing or wholesale distribution which of the two tasks is most important, I suspect you would get a variety of answers. Because there is no established doctrine, you may have the opportunity to influence the attitude of senior management.

If the prime role in your company is to reduce costs, then the costing and pricing of warehousing receives primary emphasis. If you are a provider of warehouse services, you will urge prospective customers to give you a chance to present prices. Furthermore, you will suggest that your prices are nearly always more favorable than competitive warehouses.

If you are a buyer, you will focus on rates rather than services. When a vendor presents a rate quotation, you will explore the chances to reduce the price.

For both buyer and seller, the presumption is that the vendor with the lowest price will win the business.

Value-added services

For many years, logistics service providers have emphasized their ability to provide extra services beyond the normal transportation, storage and handling. In his writing, researcher Richard Armstrong draws a distinction between the traditional public warehouse and the contemporary value-added warehousing and distribution, or VAWD.

In his report on revenues, Armstrong finds that 2002 was the first year when VAWD revenue exceeded public warehousing. When Armstrong lists the top 25 companies, only VAWDs are considered.

But the term "value-added services" has been abused to the point of being nearly meaningless. When the term was first used, it was a magic potion that was as pure as motherhood.

Those warehousing service providers who could do more than ship and store trumpeted their value-added capabilities. The value-added concept became a mystical phrase, as evidenced by Armstrong's use of the language to separate the modern distribution operation from the stodgy old public warehouse.

What does "value added" really mean?

For the service provider, extra services are a miracle adhesive. While every warehouse operator knows how to ship and store, the ability to perform more sophisticated operations may separate the progressive provider from the old-fashioned competition.

The provider hopes the ability to perform extra services may convert warehousing from a commodity into a strategic profession. The expectation is that these services are not easily copied or transferred to another source. The two characteristics of value-added services is they are both scarce and complex.

For the buyer, a value-added service is something that either improves productivity or changes the identity of SKUs in the warehouse, or possibly does both.

Changing the identity

Various forms of packaging may be the most frequently applied value-added services in the distribution center.

Postponement is the conversion of an unmarked package into a private-label product. This may involve the application of new labels onto unmarked cans or boxes, thus changing the identity of the SKU. Postponement reduces the risk that private label merchandise will not sell, and it allows a plain vanilla package to be converted into an infinite number of private brands.

Bulk to package filling is the transfer of material from a bulk container into consumer-sized containers. With chemicals, this may involve moving product from a tank or silo and filling smaller packages.

Assembly is the conversion of knocked-down (KD) merchandise into fully assembled products that are ready to be used. This operation is commonly used in furniture distribution with items such as tables and beds.

Marking or recording is another common value-added service. Some distributors want a record of serial numbers or production lot identification on all product that is shipped. Others may apply price marking at the distribution center rather than at the source.

In each of these examples, the item that is shipped has a different identity from the product that was received.

Enhancing delivery service

Other services will alter the method of shipment.

One of these is fulfillment. Rather than the handling of customer orders from a central location, each consumer has the ability to order a product directly from the warehouse through email. This is usually a credit card transaction through a website. More than a century ago, mail order houses such as Sears and JC Penney handled similar transactions, but the communication was usually by mail, and payment was by cash or check.

Transportation management may be a value-added service. It is offered by the warehouse operator who has the skill and experience to implement a faster or less costly method of customer delivery. Transloading, cross docking and freight consolidation are some examples of improved transportation management.

Reducing the order-cycle time may involve multiple shifts and/or weekend shipping. The result is the time between receipt of a customer order and delivery of merchandise is reduced.

Other options

Some warehouse operators may offer a type of storage that most competitors cannot provide. This could include temperature or humidity controls, security vaults and hazardous material controls.

While nearly all manufacturers and distributors suffer with the challenge of handling customer returns, a few warehouse service providers have made reverse logistics into a specialty. Reverse logistics includes everything from repackaging to minor repairs to asset recovery.

What is the value of the value-added service?

A truly significant improvement in value is measurable. When the warehouse manager greatly improves performance, how do we measure the value that is really added? No service is truly a value add unless the customer perceives it as such.

With the passage of time, services that were considered as "special" a few decades ago are common today. Two examples are fireproof storage and computerized inventory control.

Here are a few of the questions that might be answered:

• If the warehouse manager reduces order cycle time by two days, what is that improvement worth to the buyer?
• If the warehouse service provider offers to handle customer returns, what is the value of that extra service?
• If the shipment accuracy rate is changed from 92 percent to 99 percent, what is that improvement worth to the customer?
• If the warehouse can handle postponement as well as storage and handling, what is the value of that extra service?
• When the consignee sings the praises of the warehouse provider's service, what is that worth?
• What is the value of applying consumer packaging at a distribution center that is close to the market?

Changing the mindset

Professor Bud LaLonde reminded his students and clients that those service providers who do not record and report their successes are condemned to constantly defend their occasional failures.

Before the buyer complains about costs and asks for lower prices, the vendor should emphasize the value of improved warehousing services. Furthermore, these benefits can often be quantified, and they should be.