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DISTRIBUTION TECHNOLOGY ROI CALLED DISAPPOINTING

NASHVILLE, Tenn. -- While acknowledging that adoption of new technologies has brought efficiency to a wide variety of distribution operations, executives from two of the nation's largest wholesalers also noted that paybacks in the form of significant cost savings have not yet materialized.Between 1994 and 1997, when technology usage in distribution centers increased significantly, total operating

NASHVILLE, Tenn. -- While acknowledging that adoption of new technologies has brought efficiency to a wide variety of distribution operations, executives from two of the nation's largest wholesalers also noted that paybacks in the form of significant cost savings have not yet materialized.

Between 1994 and 1997, when technology usage in distribution centers increased significantly, total operating expenses for warehouse operations increased from 3.06% of sales to 3.60% of sales, according to the 1997 Wholesale/Retail Distribution Center Benchmark study.

"[Distributors] haven't been successful in lowering their labor costs, and this is their largest single expense," said Greg Heying, senior vice president of distribution at Supervalu, Minneapolis. "The question is, where is the payback on their technology investment?"

The study also noted that between 1994 and 1997, distributors' expenses for direct hourly labor jumped 14.1%, even though employee wage rates increased only 4.5%. The study was sponsored by Food Distributors International, Falls Church, Va., and the Food Marketing Institute, Washington.

Heying and Gary Capshaw, vice president of logistics at Fleming Cos., Oklahoma City, spoke at a workshop on "Evaluating Technology Investments" at the 1998 Productivity Convention and Exposition held here last month.

Both Heying and Capshaw believe technology has increased distributors' capabilities and simplified logistics. Advances such as radio frequency technology, for example, have facilitated better inventory management and real-time tracking of product movement in the warehouse, as well as provided forklift operators with quick access to retrieval data.

The question both posed, however, was whether the increased functionality was worth both the initial investment and the hidden costs of advanced technologies.

For example, "RF requires a high level of system uptime, accurate data input and auditing and close supervision to achieve benefits," said Heying. "In addition, as conditions change with a distribution center's operations, that may simplify or negate the need for this technology."

Electronic data interchange is another area where benefits have been strong, but less impressive than originally expected. "Purchase orders and invoices via EDI are the only significant penetration, although they do provide significant benefits," said Capshaw.

Both Capshaw and Heying warned against using technology that could not easily adapt to changing conditions. "Warehouse management systems, for instance, must be able to respond to changes in dealing with manufacturers, customer requirements and order requirements, without major information technology upgrades," said Heying.

In planning for the use of technology, IT executives should "justify the systems conservatively," he added. Before making a purchase, they should "know what problem the system is supposed to solve."

"Wholesaling is a relatively low-tech business with its own set of demands, but it must be open to new technologies and processes," said Capshaw. IT executives need to "be cynical and ask questions," as they consider technology investments, he added.