Inside Logistics

Retail column: So you think you need a new DC

Asking questions clarifies the decision-making process

November 2, 2012
by Edward Stevens


When someone says, “We need a new distribution centre,” the first thing to ask is “Why?”

The reason to build new or replace a distribution centre must be understood, and it must be justifiable, based on three key elements: the current business needs, the future vision of the business and the project funding. Some of the best reasons are demonstrated needs for more storage, increased throughput, more pickfaces, operational reorganization (centralizing or decentralizing), managing costs, automating manual procedures, reducing maintenance costs or improving energy efficiency.

When working with clients or in-house teams, our consulting group prepares lists, questions, and flow charts that don’t lead directly to a pre-calculated answer. We do that to get people thinking and talking—which will (at the very least) take the blinders off someone who believes the answer is simple.

The goal is to make senior management understand whether a new distribution centre is truly required. Sometimes we say this establishes the “burning platform”. Skipping this starts a perpetual looping nightmare: no matter how far past that point you think you are, your project is really still at the first step.

Any DC design project has a series of gates that must be unlocked by getting senior management’s approval. Without it, you can’t move forward. If you try skipping a gate, you don’t really make any headway. You end up filling files with endless “what if” scenarios. Scenarios are nice to have in the beginning, but without control they breed like rabbits.

Also, remember that to ensure the success of the project, the ultimate decision maker, or sponsor, should be a very senior company official who can champion the project. The process just to obtain approvals can take a year.

To validate that a new distribution centre is required, start by asking the DC’s operational management whether facility capacity is an issue. They should have a reasonable perspective about product congestion in the aisles, lift truck traffic delays, late or recycled orders.

The facility’s operational management should complete a material handling equipment audit to demonstrate that all reasonable opportunities for improvement within the facility have been exhausted and a new facility is actually needed. Some important questions addressed in the audit are:

  • Can narrow-aisle or very-narrow-aisle storage systems be installed?
  • Can mezzanine structures be built or high shelving installed?
  • Can storage density be increased by double-deep or multiple-deep racks?
  • Does the DC need a clean-up of obsolete materials and equipment?

After many years of managing distribution centres, I found that designing one is an art of balancing throughput with storage. Inventory storage capacity may be limited within a distribution centre since most retail facilities are designed to maximize throughput and not storage. Designing and running a distribution centre is also an art of balancing productivity with flexibility. Having operational flexibility is the key to managing future growth and the annual or seasonal changes in product assortment and packaging.

If extra staff and lift trucks cannot be added, throughput can be increased by operating the facility more hours per day or more days per week. Can you open the DC more than five days a week? Can it run 20 or 24 hours per day?

If SKU growth is a concern, fixture capacity should match the SKU lifecycle needs. SKU exit strategy should be established to clean up obsolete inventory. If peak seasonal capacity requires a short-term solution, rented space should be explored.

The next step should be to complete a supply chain network analysis. This analysis helps everyone to understand the first of three key elements introduced earlier: the needs of the business.

The supply chain network analysis evaluates all costs and constraints for future scenarios. For similar facilities the optimal (least cost) scenario is recommended and driven by the supply (inbound) and demand (outbound) transportation costs.

A network analysis addresses number and location of DCs, the product mix, store assignments to a DC, and which suppliers ship to each facility. A network analysis does not directly address transportation management, staffing, 3PL selection, site selection, facility design, inventory optimization or energy saving initiatives.

A key component of the network analysis is data validation. All information used must be verified for accuracy and must make business sense.

Once you figure out what the facility could look like, it is time to develop a base case, complete with alternatives. Now you start to ask about “game changers”, and about what the business will look like in five to 10 years. A new facility is an opportunity to do more than just create space for more SKUs and inventory. You can also improve product flow.

Automated processes should be considered since they can increase productivity and accuracy. Since buying a new property is very expensive, maximizing the use of every acre helps to justify the costs of automated processes and systems.

Edward Stevens is the pseudonym of a professional who has worked in the Canadian retail supply chain for over 30 years, with a strategic focus on the physical distribution of goods and the systems (including the people, processes and technology) that make up flexible, cost-efficient and effective delivery design. He and his colleagues have extensive experience in facility operations management, industrial and mechanical engineering, and facility design.