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POWER SHIFT: THE RISING CONTROL OFDISTRIBUTORS AND RETAILERS IN THESUPPLY CHAIN FOR MANUFACTUREDGOODSAmy K. Glasmeier a & Jeff Kibler ba Department of Geography, The Pennsylvania State University,University Park, PA 16802b Smeal College of Business, The Pennsylvania State University,University Park, PA 16802Published online: 15 May 2013.

To cite this article: Amy K. Glasmeier & Jeff Kibler (1996) POWER SHIFT: THE RISING CONTROL OFDISTRIBUTORS AND RETAILERS IN THE SUPPLY CHAIN FOR MANUFACTURED GOODS, Urban Geography,17:8, 740-757, DOI: 10.2747/0272-3638.17.8.740

To link to this article: http://dx.doi.org/10.2747/0272-3638.17.8.740

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POWER SHIFT: THE RISING CONTROL OF DISTRIBUTORS AND RETAILERS IN THE SUPPLY CHAIN FOR MANUFACTURED GOODS

Amy K Glasmeier Department of Geography

The Pennsylvania State University University Park, PA 16802

Jeff Kibler Smeal College of Business

The Pennsylvania State University University Park, PA 16802

Abstract: The development of new technology combined with the process of deregulation is changing the organizational structure of firms in the wholesale sector. These factors are altering the traditional location of wholesale and warehouse employment, and a variety of countervailing locational tendencies are emerging, including the decentralization of large mass wholesalers and their warehousing complexes and increasing specialization of inner-urban wholesale and warehouse functions. Nationally based wholesalers now transport goods off-hours to meet the needs of large-destination customers. Small, specialized firms make use of new technology to reduce costs, while offering highly tailored services to traditional customers. There also is a general reduction in wholesale employment, with losses concentrated in inner-urban areas as large wholesalers move their warehousing operations out to rural and adjacent suburban areas to take advantage of cheaper land and labor.

Telecommunications and transportation deregulation have dramatically affected the location of economic activities. The most visible changes have occurred in the manufacturing sector, where decentralization has redrawn the map of manufacturing location. The reallocation of manufacturing has been a response to location factors such as differences in labor costs and quality, market and transportation access, and enthusiasm of pro-business communities (Coffee, 1994). Although the ranking of these factors has changed over time, the same factors continue to top the list of important determinants of plant-location decisions.

The same type of consistency can be seen in factors deemed important in the location of the wholesaling and warehousing industries, but as Peter Drucker has noted (1992), the power has shifted to the end market. The major determinants of wholesale/warehousing location are proximity to customers/clients, reasonable real estate costs, access to interstate highways, availability of appropriately skilled workers, and reasonable costs of doing business. Large-scale changes in the regional distribution of wholesaling and warehousing also are a direct result of shifts in the United States population toward the Southeast and secondarily toward the West (Earthman, 1990).

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Urban Geography, 1996, 17, 8, pp. 740-757. Copyright © 1996 by V. H. Winston & Son, Inc. All rights reserved.

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Motivations for the expansion of wholesaling and warehousing vary by firm and final market. For some firms, deciding where to locate a distribution center is a response to market expansion resulting from incremental increases in demand associated with existing markets. For other firms, opening a distribution facility represents the establishment of a new market (e.g., Wal-Mart establishing suburban locations; Nordstrom's move into the Northeast; Trader Joe's move into the Metroplex corridor around Washington, DC) (Andel, 1995). In addition to new markets and incremental expansions, firms also are reorganizing distribution services to corres­pond with changes in the organization of production and the operation of markets. On a firm-by-firm basis, such actions often lead to fewer and larger distribution facilities.

It is doubtful that future locational patterns for distribution and warehousing services will look exactly the same as in the past, however. Firms making location decisions assign individual weights to location factors depending on strategy (e.g., low distribution costs, high-quality customer service, reductions in inventory, better proximity to customers, or some combination of these factors) (Traffic Management, 1993). Like the location of economic activity more generally, exogenous factors— such as the passage of the North American Free Trade Agreement (NAFTA) or the dramatic revaluation of Japan's currency—also exert an important influence on future wholesale location decisions (Andel, 1995).

WHOLESALE EMPLOYMENT: A MAJOR ANCHOR IN URBAN AREAS

The Office of Technology Assessment (OTA) requested that the authors prepare a study of the implications of new technology and transportation deregulation for the spatial dispersion of employment in the wholesale/distribution industries. Wholesale and warehouse jobs traditionally have been a source of relatively high-paying, steady employment for inner-city residents. The historical pattern of wholesale and ware­house employment has been decidedly urban. Given technological change and deregulation, there is considerable uncertainty regarding the longer-term location of wholesale and warehouse employment.

This paper blends insights from interviews with wholesale distributors and industry experts with secondary materials to document emerging trends in the wholesale sector. The paper emphasizes how the development of new technology, combined with the process of deregulation, is affecting the organizational structure of firms in the wholesale sector and, by implication, how this will alter the traditional location of wholesale and warehouse employment. We suggest that there will be a variety of countervailing locational tendencies, including the decentralization of large mass wholesalers and their warehousing complexes, combined with increasing levels of specialization of the remaining inner-urban wholesale and warehouse functions. Nationally based wholesalers will transport goods off-hours to meet the needs of large-destination customers. Small, specialized firms increasingly will make use of new technology to reduce costs, while offering highly tailored services to traditional customers. We anticipate a general reduction in wholesale employment, particularly in inner-urban areas as large wholesalers move their warehousing operations out to rural and adjacent suburban areas to take advantage of cheaper land and labor.

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TRENDS IN WHOLESALING AND WAREHOUSING

The environment surrounding the wholesaling and distribution industries is quite dynamic. Major operational and technological innovations are occurring both within wholesaling organizations and throughout the entire supply chain. These innovations directly affect how wholesalers conduct day-to-day operations, as well as the loca-tional patterns of the wholesaling industry. Equally important, these trends, sum­marized in the following sections, are presenting new forms of competition for wholesalers.

Inventory Management and the Supply Chain

The wholesaler is a key intermediary in the supply chain. These so-called middle­men of the distribution channel add value by consolidating goods and providing place utility to retailers and manufacturers. Warehousing, inventory management, and transportation delivery functions are the most significant elements of wholesalers' operations.

The function of inventory management has undergone a transition over the past three decades. During the 1970s, producers and distributors maintained massive inventories in major population centers to ensure customer service. Starting in the 1980s, with the deregulation of transportation, inventory management practices began to change. Transportation deregulation created a very competitive environment in the freight transportation industry. Carriers were compelled to reduce transit time and improve the reliability of their services to gain market share. Speed and reliability of service enabled manufacturers and distributors to reduce levels required to serve their markets. For example, between 1981 and March 1987, the ratio of manufactur­ing and trade inventory investment to monthly sales declined from 1.52 to 1.28 (Delaney, 1995).

Propelled by technological change, the distribution function continues to undergo significant transformation as firms now attempt to radically restructure inventory management practices. Today, companies are looking to reduce the amount of inventories held. Moreover, there is a major push by most companies to increase the number of inventory turns within a given period of time (Gecowits, 1995). Inventory management is a contemporary example of the veritable hot potato: the less time you hold on to it, the fewer the costs incurred. Inventories cost money, whether sitting in a warehouse or moving through a distribution channel (Lyon, 1991). Consequently, members of the supply chain are adopting various techniques to reduce inventory levels and increase inventory velocity. Controlling inventory levels relative to sales has become a paramount goal of firms in the manufacturing, retail, and wholesale sectors.

Fundamental changes in inventory management methods also may have perma­nently changed the relationship between inventories and the business cycle. In the past, unplanned inventory build-up was associated with recessions. Inventory increases before such recessions usually coincided with increases in the business inventory-to-sales ratio. However, a 20-year low in the ratio of inventory-to-sales levels as of 1994 suggests that firms have developed a means of maintaining a minimum level of inventory. Consider, for example, just the inventory-to-sales ratios of the manufacturing sector. This sector has adopted more efficient inventory

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management techniques that have contributed heavily to the decline in the aggregate inventory-to-sales ratio. Innovations such as just-in-time delivery allow production to respond faster to changes in demand, minimizing unplanned inventory accumulation (Allen, 1995). The unexpected increase in consumer spending in 1995 caught some firms understocked. Automakers like Ford and General Motors experienced short­ages of popular car models (Allen, 1995). As suggested in the next section, various inventory techniques are being adopted to enable faster reaction and adjustments to shifts in demand.

Rapid Inventory Turnover. Speed has become the watchword for success. From product sourcing and development to delivery, speed is essential to competing in today's environment. In the past decade, companies across all industries have sought profitability by cutting cycle times and inventory levels. This trend first became apparent in the automobile industry, starting in the early 1980s. During this period, auto manufacturers began implementing just-in-time production techniques (JIT) to reduce their stockpiles of inventory. The concept of JIT is simple—deliver material to production points in the exact amount at the precise time needed. Right behind JIT, in the retail apparel industries, came the concept of Quick Response (QR). With Quick Response, the manufacturer and retailer share point-of-sale data from the retailer's cash register to coordinate the flow of inventory from plant to store. K-Mart has adopted a Quick Response program with its vendors. Over 200 suppliers participate, including 3M, AT&T, Fisher Price, General Electric, Kimberly Clark, and Procter & Gamble. K-Mart reports that QR is trimming its inventories by some 20% (Cooke, 1992). Grocery stores and their suppliers took note of the retailers' success with QR and proposed a similar stock replenishment strategy called Efficient Consumer Response (ECR). Grocers, wholesalers, and suppliers are just beginning to implement ECR on an industry-wide basis.

The latest philosophy being considered by forward-thinking manufacturing com­panies is Time Compression Management (TCM). TCM is a strategy for achieving supply-chain integration by eliminating all non-value-added activities in business operations (Cooke, 1994a). For example, eliminating unnecessary product movement or storage removes non-value-adding activities. Thus, the removal of any activity that does not add a form of product utility is an elimination of a non-value-adding activity. The percentage of goods shipped using QR/JIT is expected to increase almost threefold, from 14.4% to 39%, by the year 2000 (Warehousing Education and Research Council [WERC], 1994). Because of difficulties in controlling such a system, not all companies are instituting revolutionary inventory-management tech­niques like JIT, QR, or ECR. However, most companies are pursuing inventory strategies that utilize elements of the methods discussed above. For instance, a firm may find that completely eliminating its buffer stock (JIT theory) is too risky because of the consequences of a stock-out (e.g., a manufacturing firm that risks shutdown of a production line due to a stock-out). Nonetheless, most firms are reducing buffer stocks and implementing modest adaptations of modern inventory methodologies in order to reduce operating costs. Regardless of the inventory method utilized by the manufacturing and retailing sectors (JIT, QR, ECR, or TCM), these time-based and speed-to-market strategies eventually will force re-engineering of the distribution channels.

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There are conflicting opinions on how the organization and location of the wholesale industry will be affected by these inventory strategies. Dr. John Coyle, a national expert on business logistics planning and management at The Pennsylvania State University (Coyle, 1995), presents two possible scenarios for the wholesaling industry with regard to urban areas:

1. Congestion is a major obstacle to wholesalers and distributors using a JIT approach in urban areas. This situation could sustain where appropriate, or bring about where needed, small-scale wholesale distribution centers within the urban core. These centers would act as satellites of the large-scale distributors.

2. Wholesalers could shift their facilities to the suburbs and serve the urban market using off-hour delivery scheduling.

Locational shift is not the only effect on the wholesaling industry from reductions in cycle and turnover time. These strategies (JIT, ECR, QR) also are being driven by the concept of total quality management (TQM), which seeks to reduce the number of transactions (and therefore costs) within the supply chain. To achieve this goal, relationships are developing between suppliers and retailers that are eliminating the wholesalers' function—for example, by direct store delivery from the supplier to the retailer.

Direct Store Delivery. Fifteen years ago, direct store delivery (DSD) was hailed as the ultimate breakthrough in distribution for the grocery sector; the technique was predicted to help both grocery suppliers and retailers reduce costs and inefficiencies within their warehousing and transportation network. By relying more on a JIT-like system, deliveries could be made directly to retail locations on an as-needed or as-ordered basis. Because of the lack of management and transaction control, DSD met with limited success initially. But DSD now is regaining momentum as a major strategic thrust. The key to its penetration has been the creation of a transparent, user-friendly, appropriate-scale technology that facilitates the application of principles of electronic data interchange (EDI) and allows more efficient backdoor receiving. Standards have been developed to enable the same kind of fully automated, computer-to-computer exchanges at the receiving end, without the need for manual data entry (a technique heretofore widely used in the grocery industry in conjunction with mainframe computers) (Barks, 1992).

Consolidation of Distribution in Producer and Consumer Markets

Organizational changes are being facilitated and in some cases accelerated by applying communications technology to the wholesale distribution sector and its affiliated industries. Warehousing and wholesaling are converging at a time when a paperless electronic transaction will link manufacturers to final customers. Point-of-sale (POS) data fed back through the system will trigger production, and EDI, bar coding, and cross-docking will deliver the good to the customer, all in a dramatically compressed time frame. As technology allows a firm to consolidate functions at an optimal geographic location, the capacity to achieve economies of scale also increases. A consolidation of operations in most cases will decrease per-unit costs and increase the learning-curve effect.

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Over the past decade, firms in many industries have drastically restructured their logistics function. In the producer-goods industries, major equipment manufacturers are changing their relationships with suppliers. This has led to fewer suppliers, longer contracts, and the holding of inventory in fewer locations. In consumer-goods industries, most companies have undertaken major consolidations of inventory stocking locations. Fifteen years ago, most consumer packaged-goods companies operated 10 to 15 stocking locations; today, they have consolidated operations in 5 to 7 locations. National pharmaceuticals and medical-products distributors, for exam­ple, previously operated up to 90 locations; today, the three major distributors have between 45 and 48 facilities, with plans to consolidate further to between 30 and 35 locations. This consolidation of stocking locations over the past decade was driven primarily by two factors—transportation deregulation and enhanced information-systems capabilities (Copacino, 1993).

The information technology used in today's warehouses and transportation depart­ments includes electronic data interchange (EDI), bar-coding systems, automated processing systems, and satellite tracking systems. The application of technology has significantly reduced cycle time (the lag between order placement and final delivery of the product to the customer). It also has resulted in more accurate picking and shipping of products to fill orders (Cooke, 1994b).

Electronic Data Interchange. Electronic data interchange (EDI) most commonly represents computer-to-computer information interchange. EDI significantly improves the breadth, timeliness, and quality of data. Companies communicate order shipment information with vendors, suppliers, transportation carriers, and customers (Coyle et al., 1992; Coyle, 1995). EDI allows companies to share data on consumer demand for a product. Retailers can capture information at the time of purchase and send that intelligence upstream to the supplier. The exchange of such information allows for closer integration between supplier and receiver to meet the needs of the marketplace. EDI allows strategic partnerships to work more closely together. In fact, replenishment strategies such as QR and ECR are predicated on the use of EDI (Cooke, 1994c).

EDI had its beginning in the transportation industry in the early 1970s. Now it has spread to and integrated manufacturing, retailing, warehousing, brokerage, and government. Texas Instruments (TI) has used EDI since 1969. Through trial and error, EDI at Texas Instruments has grown from a case-by-case application to a system that links more than 1,900 trading partners in 23 countries and has a traffic record of 2,500 documents per day. With Texas Instruments using EDI, shipping errors were reduced by 95%, field queries in inventory and planning were reduced 60%, 70% of data entry clerks were reassigned, and cycle time for global procurement improved 57% (Youngblood, 1993, p. 44). Standardization of EDI systems across industries still remains a problem, but actions are being taken to increase compatibility among systems. Inroads are being made even in problems that hamper the application of EDI in an international context.

In wholesale distribution, EDI applications are particularly advantageous because of the wholesale distributor's central position in the supply pipeline; it is not difficult to appreciate the volume of upstream and downstream communications that the whole­sale distributor must process each day. EDI usage in wholesale distribution is

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expected to rise from 39% to 85% over the next five years. Only 13% of wholesalers do not currently plan to add an EDI system (Arthur Anderson and Company, 1990).

The use of EDI technology is expected to increase in all types of warehouse operations. EDI to public/contract warehouses already was 23.9% in 1990; steady growth is projected to the year 2000, when almost 60% of transactions will involve EDI. Transportation carrier use of EDI was 7.5% in 1990; it is expected to increase to 42.1% by the end of the century (WERC, 1993).

Cost savings from the application of EDI, particularly in office-related clerical and data-entry operations, can be enormous. Comprehensive EDI communication sys­tems have been found to decrease general clerical costs by over 60%. These EDI systems also have been known to decrease purchase order (PO) maintenance costs by 80% (Mercer Management Consulting, 1994). EDI technology substantially reduces the amount of administrative labor needed to support a wholesaler's operations. This results in a significant decrease in particular occupations and is a major factor in possible reductions in wholesale employment.

In some situations, EDI will compress time for the wholesaler and facilitate a more flexible distribution system. In this context, EDI will permit the wholesaler to decentralize distribution functions farther from urban markets. Order transmittal and processing are the portions of order cycle time reduced by EDI. Thus, it provides a greater window for transportation time. This situation will present the wholesaler with the opportunity to locate in areas with lower land and labor costs—two large components of warehouse costs. In addition, EDI will provide the wholesale distribu­tor with the opportunity to consolidate operations to serve several urban markets from a centralized distribution facility. In some cases, the communications technology will create opportunities for site selection in a larger geographic area. Moreover, EDI creates the ability to communicate demand in real time from the point of need to the point of supply. This enables wholesalers, distributors, and manufacturers to react more quickly to demand. In addition, it becomes possible to use more current data as a basis for forecasting demand.

Equally important to the structure of the wholesale industry, EDI technology eliminates some of the functions provided by the wholesaler between the retailer and supplier. EDI is a key tool used in direct store delivery and cross docking. It enables the retailer to provide point-of-sale inventory information to the supplier, increasing control of scheduling. There is no longer a need in certain situations for the wholesaler to act as an inventory buffer between the manufacturer or distributor and the retailer. Obviously, this situation applies more to larger retailers, which the manufacturer can service via DSD in a cost-efficient manner.

Research by the Warehousing Education and Research Council confirms the far-reaching implications of new technology for the role played by and the location of wholesaling in the supply chain. Over the next five years, the growing demand for QR and JIT practices (expected to expand almost threefold) will result in increased plant-direct shipments. EDI will expand in all areas of warehousing/distribution activity. Shipments bar-coded to specific customers are expected to reach 46% by the late 1990s. In addition, automation and mechanization of warehousing operations will increase dramatically (WERC, 1993).

Bar Coding. If EDI is the communications translator linking the transactions of firms, bar coding is the input medium of information exchange. Bar codings are

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having a major impact upon logistics. A bar coding is a series of black and white bars of varying width whose sequence represents letters or numbers. This sequence is a code that computer-controlled electronic scanners can translate into information such as shipment origin and destination, product type, and price. Individual industries use different bar coding standards. Bar codings first appeared on grocery products in the early 1970s. Later, bar coding became widespread after mass merchandisers like K-Mart and Wal-Mart insisted that suppliers adopt this form of automatic identifica­tion as a condition for doing business with them.

A bar-coding standard indicates the language used by the code. With one bar-coding standard, vendors and suppliers in a particular industry can read each other's labels. Bar coding leads to better inventory control by improving data collection accuracy, reducing receiving operations time and data collection labor, and integrat­ing data collection with other areas. Companies can assign items more quickly to the warehouse, and warehouse personnel can prepare orders more rapidly.

Bar coding's greatest advantage is its removal of human error in the checking and tracking of inventory. It often results in more timely and accurate deliveries as well as a reduction in claims processing. Jim Tharrington of the Brookfield Group has noted that one food industry supplier reported in a study that bar coding virtually eliminated customer claims for product misshipments. This was a reduction of $25,000 to $50,000 for that supplier (Cooke, 1994c, p. 65). A warehouse receiving area equipped with a bar-code system can check 300 cartons per hour, compared to 120 cartons per hour via a manual method. Bar coding also facilitates product tracking through the supply chain (Coyle et al., 1992).

Future innovations in bar coding will have a significant impact on distribution and wholesaling, similar to those of EDI technology. New bar codings designed to store greater amounts of information in ever smaller spaces can dramatically reduce administrative and order preparation time. Thus, time is further compressed, increasing flexibility in transportation times. This will enable wholesalers to migrate from urban markets to minimize costs such as labor and land.

Fixed costs for warehousing represent a major portion of total costs, but labor is by far the largest single variable cost. Both full- and part-time labor in the warehouse sector are projected to increase through the year 2000. This increase is attributable to the decrease in order time and the increase in frequency of deliveries. As a conse­quence, reductions in variable costs will be a key concern for firms seeking to optimize operations. Other studies confirm that warehouse operations are attempting to consolidate into fewer locations while decentralizing operations. This locational trend favors more remote and often rural locations.

Future improvements in the movement of goods will rely heavily on new develop­ments in bar-coding and scanner technology. Bar codings are making the leap from labels to data storage devices. The reality is that the transportation, distribution, and warehousing industries have only just begun to use conventional bar coding, let alone adopt high-tech systems. New standards utilize a fundamentally different approach to handling information, squeezing a thousand or more characters in a space the size of a postage stamp. Anything from a complete bill of lading to a list of hazardous-materials handling instructions will be easily read with a scanner.

With all the information on the label, there is no need for computers to reach into a data base, tap into a file, and then send data back to the user. Bar-coding labels

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containing texts will enable all information to be delivered with the package. The data on the label is set using EDI standards. In fact, transportation executives are calling such technology "paper EDI" (Seidman, 1993).

The use of bar-coding and scanning systems is expected to increase significantly in wholesale distribution through the 1990s. It has been estimated that usage will rise from 15% to 81% by the year 2000 (Delaney and La Londe, 1993). The implementa­tion of new technology can be summarized succinctly: costs will be reduced and cycle times will not increase.

Automation. Automation or mechanization of distribution facilities is another major trend that will affect the wholesaling industry. This automation will likely reduce manual labor on the same scale as that forecast to accompany the reduction of administrative labor through the implementation of EDI.

The best way to improve productivity in the warehousing and distribution function is to implement new or improved automated systems. However, almost 46% of wholesale distributors currently do not use some form of warehouse mechanization. By the year 2000, this number will drop by half to 23%, as warehouse technology develops and becomes more affordable and more easily implemented. Wholesaler-distributors will use more mechanization in the warehouse for three primary reasons: accelerated growth in labor costs relative to other operating costs, a shortage of appropriate labor, and faster order turnaround required by the customer (Arthur Anderson and Company, 1994). Warehouse automation is expected to climb from 17.8% in 1990 to 54.7% by the year 2000 (WERC, 1993).

The most common form of automation in warehousing is a conveyor system. Its scale can vary from a simple motor-driven belt to a complex web of conveyors interlocking all sections of a warehouse, from receiving and storage to order-picking and shipping. The larger automated conveyor systems often are supported by a control system or warehouse management system. These control systems include bar-coding technology, inventory management software, and order processing systems.

The major impediment in the automation of warehousing facilities is the lack of flexibility in automated systems. Once such a system is installed, goods processed in an automated environment must be virtually designed to fit the technology system's capabilities. "Designed to fit" refers to the dimensions and packaging specifications of the good that is processed by a specific automated system. It is extremely difficult in most cases to adjust a fixed automated system to changes in product specifications. In addition, internal adjustments in a facility's floor plan are very costly because of the complicated structural changes that accompany renovation of a complex automated system. One major effect automation may have on the wholesale industry is the abandonment of many older, multi-level, urban warehouses. These facilities are not suitable for automation regardless of cost. In most cases it is more cost-efficient to build a new facility. In addition, automation, along with EDI and bar-coding technology, is used in most cross-docking facilities. These newer facilities are structured quite differently from traditional urban warehouses.

Technological innovations in logistics, such as EDI, bar coding, and automation, will have a quite diverse effect on the skill levels of labor. These technologies will require increased skilled labor in a limited set of warehousing functions. What is termed "general warehouse labor" will not see a significant shift in labor-force skill levels. To illustrate, consider the following operating areas of a distribution facility—

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receiving, materials handling, inventory control, order-picking, and shipping. As stated previously, these functional areas may see a reduction in overall labor required because of technological innovations. However, labor skill levels, for the most part, will not shift upward. In some cases, the level of expertise required in some areas of an operation may actually decline. Thus, some of the higher-skilled positions may be eliminated.

With regard to the operating areas of a distribution facility, the skill levels of the general blue-collar worker in receiving, materials handling, order-picking, and shipping will not be dramatically affected by technology. The manual-labor elements involved in these areas, such as unloading containers, stripping pallets, handling freight, and loading trailers, do not require higher levels of expertise. For instance, an individual performing a receiving function may be required to check in freight using a bar-code scanner, but the actual use of this device will be at a very elementary level. In most cases, the task will be carried out by simply scanning a bar-coded label that is placed on the items being received. The actual task of receiving and unloading freight will be unaffected by technology. Hence, the actual skill-level demands placed on individuals executing physical tasks will be limited.

On the other hand, because of the nature of some distribution functions, there will be a need to increase the skill level of certain categories of employee. For example, in the area of materials handling, an equipment operator may be required to collect limited data.

Modern Warehouse Structure versus Traditional Urban Warehouse Structure

The ideal modern warehouse structure is designed to maximize efficient material handling and storage. The structures required are single-level facilities with high ceilings. The high ceilings, along with racking systems, provide efficient upward storage. The internal layout is designed for one-way flow of product, with the inbound and outbound functions at opposite ends of the building. This provides motion economies and efficient flow-through of goods. The actual amount of physical space needed for a modern facility varies with the type of business operation. A wholesaler consolidating operations to a single facility will require a greater amount of space than a pure cross-docking operation.

In general, older urban warehousing structures are multi-leveled and have lower ceilings than modern facilities. The professionals interviewed all felt that, in most cases, renovating older urban warehouses is not cost effective because of the extreme structural changes required for these buildings to be operationally efficient. There are cases, however, of ingenious designs leading to innovative reuses of urban warehouse facilities. For example, Space Technology, Inc. is renovating urban facilities to functional warehouses. On Long Island, New York, the company is using a patented technology called the E-Z Riser to raise the roofs on urban structures.

Another problem facing urban warehouses is the lack of facilities that meet the need for cross-docking and throughput distribution. Some real estate entrepreneurs are responding to this problem with innovative marketing techniques that undertake the necessary design plans and feasibility studies to identify possibilities for the re-use of large vacant urban properties. Clark Properties, a St. Louis-based real estate company, is in the business of renovating urban industrial property. One such

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renovation was an abandoned General Motors plant. This plant was transformed into the 160-acre Union Seventy Center, a self-contained industrial park with major warehousing and distribution operations. The Union Seventy Center represented a renovation of 3 million square feet of space. Clark Properties estimates that it will return 3,000 jobs to the St. Louis area. It already has attracted three major carriers— J.B. Hunt, Schneider National, and North American Van Lines—all of which made Union Seventy Center their St. Louis terminal (Muller, 1994).

Cross-Docking and Replenishment Logistics

The strategy behind replenishment logistics is to take inventory costs out of the pipeline, to shorten cycle time, and to smooth product flow. Achieving these goals depends on a number of factors, one of which is creating a flow-through distribution system. Many of the flow-through networks rely on cross-docking to accomplish productivity and service gains. Cross-docking covers any distribution system that avoids putting product into storage before sending it on to retail stores or other outlets. Instead, goods move directly from the receiving dock to the shipping dock. Cross-docking is most widely used in the retail sector, where large volumes of goods are ordered regularly in predictable quantities from a given set of vendors. Cross-docking works best with products that have short replenishment lead times and fairly heavy demand. It also works for products where there is some cost benefit to bringing large quantities in volume to one location, and then distributing locally in small quantities. Cross-docking is only feasible in situations in which the overall pipeline benefits outweigh the added supplier costs (Harrington, 1993).

Wal-Mart and K-Mart first embraced cross-docking in the early 1980s and demonstrated the concept's importance for flow-through replenishment of retail outlets. Today, more and more companies are looking at this technique for getting goods more quickly into customers' hands. Cross-docking allows merchandise to arrive closer to the time it is actually needed in the store. The grocery sector has taken notice of the role played by cross-docking in the success of the mass merchandiser and wholesale clubs, and has included cross-docking in its plans to implement ECR.

Changes in distribution-center layouts and extra materials-handling equipment may be required to support a cross-dock operation. The price tag for reconfiguration is not small. The total cost, including land and building for a 750,000-square-foot distribution center with 100 shipping doors and 20 receiving doors, is estimated at $40 million to $50 million (Cooke, 1994b).

Wholesalers utilizing flow-through or cross-docking operations must consider all the criteria listed above. A single-level, highly automated cross-docking facility is best located in an area of low congestion with access to major transportation routes. This type of distribution center will differ significantly from the older urban distribu­tion facilities. Inventory velocity will replace storage space.

It should be noted that not all cross-docking operations need a specific facility structure. The cross-docking facility discussed in theory is conducive to high-volume operation, but cross-docking can be implemented in lower-volume and smaller-scale facilities as well. The operation requires additional planning and scheduling, but can improve productivity at almost all levels. Given this scale of operation, some urban warehouses could be converted into efficient operating terminals, since the actual

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need for storage capacity is not as great. The main problem with adapting older urban warehousing to cross-docking is the physical structure of older buildings. In order for an efficient cross-docking operation to function, the structure must provide an adequate number of shipping and receiving doors. In addition, internally the building must be designed to allow the unidirectional flow of product through the facility. Many urban structures have an inadequate number of dock doors. Furthermore, these buildings are not designed internally for a flow-through system.

Of great significance to warehouse operations is the tremendous savings cross-docking offers in labor costs. Given that goods do not reside in the warehouse for any length of time, the logging, storing, and picking functions are virtually eliminated. Cross-docking can reduce warehouse labor by 50 to 66% (Mercer Management Consulting, 1994).

As cross-docking takes hold, there will be less of a need for warehouse space. The end result may be the closure of large numbers of existing warehouses. As warehouses close, eliminating buffer stock, the carriers will work more closely with shippers and consignees to ensure the smooth operation of the cross-dock; there will be tighter integration between the warehouse and transportation function. Storage will give way to greater fluidity of movement and flow of goods (Cooke, 1994b).

DEREGULATION: AN ADDED IMPETUS FOR CHANGE Transportation deregulation continues to have an impact on the wholesale distribu­

tion industry. Because of major transportation deregulation in 1980 (the Staggers Act and the Motor Carrier Act), transportation costs have decreased significantly. Even more importantly, new transportation services, such as pooled distribution, have expedited delivery services and various other value-adding functions. These develop­ments have changed the inventory/transportation tradeoffs so that it has become economical for companies to consolidate inventory locations and increase the service territories of their distribution centers. This logistics strategy has allowed companies to operate with less inventory and, in many cases, to reduce overall transportation costs.

Transportation has continued to be deregulated since 1980. Most recently, the deregulation of intrastate transportation has substantially increased the margins of flexibility of carriers, creating a more competitive environment between transporta­tion modes and carriers. This situation resulted in various pricing structures that make it cost efficient for a wholesaler or distributor to locate farther from the market it serves and to optimize inventory/transportation cost tradeoffs. Technologies such as EDI and bar coding enable a distributor or wholesaler to compress time and serve a particular market from an optimal location. Robert Delaney, in his Sixth Annual State of Logistics Report (1995, p. 2) forecasts the following implications of recent transpor­tation deregulation:

Instead of modest productivity, we believe that the free market in freight transportation services starting in 1995 will provide aggressive distribution productivity through the balance of the decade. Our assumptions for inflation, real growth, inventory carrying costs are the same. We believe that inventory investment will grow more slowly as warehouses that were located because of

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intrastate transportation regulation are no longer needed. As companies opti­mize their plant and field warehousing network, they will hold even less inventory in fewer places. Obviously, it is difficult to determine whether this situation will cause a straightforward decentralization of the wholesaling industry, but it will certainly precipitate some sort of locational shift.

Transportation deregulation has brought about several operational opportunities and innovations in the transportation industry. Intermodal transportation was deregu­lated, enabling shippers to optimize a mode mix that provides them with the cost/ service balance they desire. Intermodalism refers to the joint use of two or more modes of transportation. For example, shippers can take advantage of both the cost benefits of rail and also the access and flexibility of motor carriers. The underlying premise is to optimize a mode's advantages and minimize the disadvantages.

In 1991, the intermodal transportation industry set all-time records for annual car loadings. In 1992, these records were surpassed as the industry recorded even greater growth. In addition, an annual market analysis of the industry shows that almost one-third of the nation's full-truckload-freight shippers have diverted to Intermodal (Traffic Management, 1993).

Reduced freight rates and transport options are not the only innovations to arise from deregulation. The transportation industry is looking to increase its market share by offering more value-adding services. First, the differentiation between small-package shipments, less-than-load shipments (LTL), and full-load shipments (TL) is changing. In the past, the cost structure of the various-sized shipments varied by unit of weight, TL being the lowest, followed by LTL, and small shipments being the highest. New services offered by carriers provide costing for smaller shipments that is less than traditional LTL costing. LTL carriers are able to consolidate shipments across time or across place and ship full loads to particular destinations. This provides full-capacity shipping. Furthermore, many carriers are offering pooled distribution services in which consolidated loads to a particular market are delivered to various points within that market by the carrier. Pooling also may take place among several shippers consolidating freight for economical movement, thus gaining the same advantages as full-capacity loads. In the report by Warehousing Education and Research Council, entitled Trends in Warehousing Costs, Management, and Strategy, survey results showed that the use of consolidated/pooled outbound shipments is expected to increase from 29.2% in 1990 to 43% by the year 2000 (WERC, 1993).

There also is evidence that replenishment logistics is reducing the size of shipments. As the WERC report suggests, most forms of continuous replenishment result in a flow of smaller shipment sizes in the distribution channel. These smaller shipment sizes raise the unit costs of warehouse handling and transportation. On the warehouse side, these pressures frequently require the redesign of warehouses to accommodate smaller shipment sizes. On the transportation side, they will require some form of consolidation for efficient shipment to the customer. For large firms, the consolidation process probably can be managed internally. For the smaller firm, the consolidation will likely be accomplished in alliance with similar companies (WERC, 1993).

Because of the shift from the storage of goods toward the continuous flow of goods from producer to consumer, the amount of goods in transit is expected to increase in relation to the percentage of finished goods stored. Inventory in transit is forecast to

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rise from 7.5% in 1992 to 12.6% in the year 2000 (WERC, 1993, p. 4). This situation is a direct result of the changes in the transportation and warehousing industries discussed above.

MOVING DISTRIBUTION OUT OF THE FIRM AND INTO THE MARKET: THIRD-PARTY LOGISTICS (OUTSOURCING)

For the wholesale distributor, the transportation function can be very complex. Many service and cost requirements are specific to the individual firm, not only in transportation but in the warehousing and distribution functions. Contracting out of various logistics functions to third-party firms has become a viable option for companies in all industries.

Outsourcing or third-party logistics involves purchasing logistics services from a service provider outside the company. Third-party providers actually manage all or part of the company's logistics system. Companies such as IBM and Wang utilize the third-party services provided by North American Van Lines (NAVL). NAVL oversees the flow of finished products from plants to customers by controlling line-haul transportation, order consolidation and assembly, and customer delivery. Other companies such as Best Products and Sears have converted existing in-house logistics departments into separate corporate entities that provide logistics services to the parent company as well as to other companies. Some of the largest names in transportation—Federal Express, Roadway, Union Pacific, and CSX/Sea-Land, for example—have become major players in the logistics-outsourcing market (Coyle et al., 1992).

For the wholesale distributor, the management of the various logistics functions can be very complex. Many service and cost requirements are specific to the individual firm, not only in transportation, but also in the warehousing and distribution functions. The contracting out of various logistics functions to third-party firms has become a viable option not only for wholesalers, but also for companies in all business sectors. Third-party firms offer a wide variety of services. Most of these firms were originally transportation carriers, warehousers, or distributors that capitalized on their core competencies and expanded their operations to offer a menu of value-added services. For example, a transportation company may expand its services to include small-package delivery (e.g., Roadway Freight, forming RPS). In addition, a warehousing company may offer labor or management services. These third-party firms can construct a contract that specifically meets the needs of the company that is outsourcing. It is difficult to provide exact figures on the number of firms that outsource to third parties because of the wide range of services available. Neverthe­less, the logistics professionals we interviewed felt that most firms are using third-party logistics functions in one form or another.

Third-party logistics firms are by no means limited to the transportation industry. Many companies with different core competencies have become third-party service providers. For example, various firms in the public-warehousing industry have become third-party providers by offering additional service packages. In addition to general warehousing functions, third-party warehousing services offered may include labor, management expertise, pick-up and delivery services, and even inventory financing, to name a few. As one authoritative source noted, most third-party

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warehouse suppliers traditionally have had a passive relationship with customers. The public warehouse primarily has stored the shippers' merchandise and provided pick/ pack services as required. Given this situation, it is likely that third parties could establish a new role in providing value-added services to customers throughout the remainder of the 1990s. Consolidation, cross-docking, bar coding, retail delivery, and other services could be among those performed by third parties (WERC, 1993). The key to the various services offered by third-party logistics firms is that they add value.

There are a number of possible drawbacks to using third-party logistics providers, however. The control issue is at the heart of managerial opposition to third-party warehousing, and loss of control prevents many firms from using third parties (Ackerman, 1994). Obviously, if a segment of a firm's business is mismanaged by a third party, it could cause extensive damage to sales, production, and client relations, and even jeopardize the survival of the firm itself. Third-party providers are develop­ing ways to alleviate the control-loss problem. For example, Sara Copp (1995), a consultant for Ernst and Young, indicated that some third-party firms actually are providing implants that operate at a firm's location. An implant is a manager employed by a third-party provider who conducts day-to-day operations on site with the contracting firm. An implant provides direct contact and communication between the parties. In addition, the implant is able to learn and adapt to the business practices of the contracting firm. Nevertheless, control is an issue that always will prevent some firms from outsourcing.

In addition to the control issue, other limitations associated with third-party logistics providers include cost, capability, and security. The costs of using a third party may or may not exceed the firm's present cost structure. Thus, for some firms a third party is financially inefficient. Capability is another possible drawback; e.g., a third party may not have the capability to support a firm's operational growth. Consequently, the third party will be unable to provide service proportional to the contracting firm's needs.

Finally, security also could pose a problem. Many firms feel that there is a risk of confidential information falling into the hands of competitors by means of a third party. If a third-party contractor is hired and later fired, that supplier could retain full knowledge of the contractor's warehouse procedures and other confidential informa­tion. Outsourcing opponents point to a bicycle manufacturer who contracted a growing portion of its production process to a foreign supplier. When the supplier decided to be a competitor, it virtually destroyed the original manufacturer. If logistics is part of a firm's core business, it could prove dangerous to surrender this function to any outside supplier. In 1987, four students at the Harvard Business School wrote a research paper on third-party warehousing in which they identified a "top 10" group of third-party warehousers. Of those ten companies, five have changed ownership since the study was written. Therefore, it could be argued that the stability of third-party warehousing is inferior to that of other industries (Ackerman, 1994).

Even after taking into account the possible disadvantages of third-party logistics, most firms are presently using or are planning to implement the use of third-party logistics providers. From the standpoint of the wholesaler, third-party logistics firms present both opportunities and threats to the wholesaling business environment. In Facing the Forces of Change 2000 (Arthur Anderson and Co., 1994), a perspective on the effect of third-party providers on the wholesaling industry is offered. The report

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indicates that some interesting trends have emerged in the logistics area over the last 10 years that directly affect the wholesaler-distributor. Contract warehouses that compete with wholesaler-distributors are providing public warehousing services for a fee, while typically guaranteeing service levels/fill rates. Another aspect of this is the outsourcing of the warehouse functions of the wholesaler-distributor to a contract warehousing firm. These third-party independent warehouses are expected to be used increasingly by wholesaler-distributors in the future. By this method, some whole­salers may reduce their capital costs and keep their total costs on a variable, not fixed, basis.

Forecasting the future of wholesaling, Peter F. Drucker described some of the effects of the operational and technological trends presented above:

In the US hardware industry, for example, the new distributors such as Servistar are doing what three levels of wholesalers used to do; 7-Eleven in Japan has eliminated five or six wholesale levels. And this trend has only started. Physical distribution is changing too. In many industries the warehouse is becoming redundant. In others it is changing function. One medium-sized supermarket chain now handles half its merchandise without any storage; it goes directly from manufacturer to store. The other half still goes through the warehouse. But it is not held there; it goes out within 12 hours, soon to be cut to three—in transportation parlance, the warehouse has become a switching yard instead of a holding yard (Drucker, 1992, p. A16).

Drucker clearly suggests that the concept of the supply chain is undergoing a transition or restructuring. The operational and technological issues presented in this section support the proposition that supply chains are shortening and order cycle times are decreasing. The innovations in logistical operations are allowing firms to eliminate the need for some intermediaries within the supply chain. Furthermore, technological innovations are allowing firms to redesign their distribution facilities spatially in order to optimize site selection and achieve economies of scale through the consolidation of functions. The consequences of these innovations are too dynamic to forecast with much precision. However, it is apparent that a significant locational shift will occur in some segments of the industry, depending on the nature of the business operation. Some segments of the wholesaling industry may disappear, whereas others transform operations to adjust to the changing business environment.

CONCLUSIONS

The wholesale industry is urban. Regardless of region, high levels of employment in the industry are concentrated in the nation's largest urban counties. Although some decentralization of wholesale employment has occurred over the last 25 years, the industry nonetheless remains surprisingly urban in orientation. But the role of wholesaling and warehousing is being radically altered as new technology pervades the industry. With communications-based technologies such as EDI and bar coding, wholesalers are increasingly able to link up with intermediate and final markets, drastically reducing the amount of paperwork associated with the storage and transfer of goods. Telecommunications capabilities are influencing firms' ability to ship direct

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to final market; hence, goods in transit are increasing at a commensurate rate. Goods are circulating faster and more efficiently than ever before.

There is significant anecdotal evidence that the new technology also is leading to consolidation of and increases in economies of scale in the warehousing and wholesaling industries. Warehousing facilities are growing larger and to some degree decentralizing, in some cases toward the edge of urban areas and into rural communities.

Third-party logistics, by which firms subcontract out the storage and transport functions, also are changing the industry. Large firms in particular are shifting the distribution function into the market. This is increasing efficiency and shifting jobs from the originating firm into the third-party firms. The extent to which this changeover is likely to lead to job declines is difficult to determine. While third-party activities may not result in job declines in the short run, our interviews nonetheless suggest that as the industry further rationalizes, the wholesale sector is likely to experience job losses. In warehousing, in the short run, there will be employment gains as firms consolidate and take over activities that currently take place in private firms. Because labor costs are the largest single variable cost of warehousing firms, there is likely to be a movement to reduce the wage bill by locating in areas where wages are low and the work ethic is high.

Peter Drucker's prophetic statement made in 1992 certainly has come to fruition— the power does appear to have shifted to the end market. Organizations such as Wal-Mart wield an enormous amount of market power through their ability to homogenize demand at the level of the nation. This is clearly a new and growing trend.

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Andel, T., 1995, The Northeast back to life. Transportation and Distribution, Vol. 36, 36-40.

Arthur Anderson and Company, 1990, The Technology Maze in Wholesale Distribution, Choosing the Right Path Washington, DC: Distribution Research and Education Foundation.

, 1994, Facing the Forces of Change 2000: The New Realities in Wholesale Distribution, Washington, DC: Distribution Research and Education Foundation.

Barks, J., 1992, Grocery distribution: DSD gets its foot back in the store. Distribution; Vol. 91, December, 45-46.

Coffee, H., 1994, Location factors: Business as usual, more or less. Site Selection, February.

Cooke, X, 1992, A quick response success story. Traffic Management, Vol. 31, October, 54.

, 1993, Intermodal finally comes of age. Traffic Management, Vol. 32, April, 48.

_____, 1994a, Technology ups the ante in the quality game. Traffic Management, Vol. 33, April, 64-65, 68.

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______, 1994b, Beyond quality . . . speed. Traffic Management, Vol. 33, June, 33. _____, 1994c, Cross-docking rediscovered. Traffic Management, Vol. 33, Novem­

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arguments, and common sense. Sixth Annual State of Logistics Report. St. Louis: Cass Information Systems, June 5.

and La Londe, B., 1993, Trends in Warehousing Costs, Management, and Strategy. Oak Brook, IL: Warehousing Education and Research Council.

Drucker, RE, 1992, The economy's power shift. Wall Street Journal, Vol. 110, Sept. 12, A16.

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Harrington, L.,1993, Cross docking takes the costs out of the pipeline. Distribution, Vol. 92, September, 64.

Lyon, M., 1991, Inventory busters. Inbound Logistics, Vol. 11, November, 28. Mercer Management Consulting, 1994, New Ways to Take the Costs out of the Retail

Food Pipeline. Atlanta, GA: Coca-Cola Retailing Research Council. Muller, E.J., 1994, Urban logistics. Distribution, Vol. 91, April, 68-70. Siedman, T., 1993, BC labels turn high-tech. Distribution, Vol. 92, January, 83-84. Traffic Management, 1993, A Guide to Site Selection in the 1990s, September. WERC (Warehousing Education and Research Council), 1993, Trends in Warehousing

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