Inside Logistics

The cost of uncertainty: MM&D’s 2014 DC Cost Benchmarking Study

MM&D conducted an original research study and roundtable focus group on DC costs with support from BDO Canada. This is the editorial report, first published in the July-August print edition.


L-R: Kerri Plexman, partner, audit and assurance group, BDO Canada; Andrew Kirkpatrick, director of sales at NFI Industries; Yves Belanger, consultant in supply chain logistics with West Monroe Partners; John McKenna, president of McKenna Logistics Centres; Duane Chiasson, CITT, Pierrock Consulting. Seated: Peter Maropakis, assistant vice-president of distribution services and operations, TJX Canada. Missing: Dan Gowette, DC manager, TFT Global.

September 10, 2014
by Emily Atkins

This is the second iteration of the MM&D Canadian DC Cost Benchmarking Study. The study was first conducted in 2011, and repeated in 2014 with sponsorship from BDO Canada. In this feature article you’ll find the results of the research and the roundtable conducted to discuss the issues raised in the research.

bdo_logo_cmyk_290709BDO is pleased to collaborate with MM&D magazine on the DC Cost Benchmarking research and roundtable.

Surveys like this are an important vehicle for our clients in the industry to provide input on issues that matter to them, shaping the industry for future growth and development. Issues such as rising costs, staffing and increasing efficiencies remain top of mind and these results echo what we hear from our over 2,000 clients in the warehousing and distribution industry on a daily basis.

We are encouraged to learn that organizations are investing in operational improvements and controls and dedicating a large portion of their budget to address the staffing issues, suggesting executives are proactively seeking ways to address these issues. BDO would like to thank the over 150 business leaders who participated in this year’s survey and are proud to work with MM&D to bring this valuable research to you.

What does it cost to run a DC in Canada? This is the fundamental question that prompted the creation of the first DC Cost Benchmarking study. Until our 2011 research project there had been no uniquely Canadian research into the costs of running a warehouse or DC in this country.

After a three-year interval we decided it was time to revisit the question to see if costs had shifted in the intervening years. We fielded the same survey in 2014 as in 2011 to ensure the data would be comparable.

The research results are found in the charts and graphs in the following pages. The roundtable discussion is summarized in the accompanying article. To see the complete print article please visit page 14 of our July August 2014 Digital Edition.

Our panelists were: Yves Belanger, consultant in supply chain logistics with West Monroe Partners; Duane Chiasson, CITT, Pierrock Consulting; Dan Gowette, DC manager, TFT Global; Andrew Kirkpatrick, director of sales at NFI Industries; Peter Maropakis, assistant vice-president of distribution services and operations, TJX Canada; and John McKenna, president of McKenna Logistics Centres. Our sponsor and host was Kerri Plexman, partner, audit and assurance group, BDO Canada.

Figure 1

Figure 1: We asked: What is your biggest issue regarding your warehouse/distribution centre(s), that is, what issue keeps you up at night regarding your distribution centre(s)?

The first task for the panel was to identify the issues that jumped out at them from the research results. They identified space planning and utilization, inventory management, establishing service level expectations, labour management and finding efficiencies and the penetration of technology.

In the interests of space we had to select just some of these that prompted the greatest amount of discussion in the group. You’ll find coverage of each of the hottest topics below.

The theme our panelists returned to again and again was the role of uncertainty in planning and operating a DC or warehouse. Economic conditions, consumer preferences, product lifecycle, e-commerce, real estate costs—all of these were cited as sources of uncertainty that makes predicting cost-effective inventory levels a challenge.

“Continual change is the norm,” said Dan Gowette. “And how do you cost that? Because if you’re continually having to change to meet your customers’ requirements and still maintain a competitive edge, it becomes very difficult to be able to plan for that inside of your structured costs. So it becomes very much a juggling act, doesn’t it?”

Space planning and utilization

Figure 7

Figure 7: We asked: In total, how large, in square feet, is/are your distribution centre(s) in Canada? (If you have more than one, please provide a total of all added together.

The research showed a trend towards smaller DCs. (See Figure 7.) John McKenna proposed that cost pressures following the 2009 recession may have prompted companies to reduce their DC size. “People were looking to consolidate; they were trying to reduce their costs as quickly as they could. So if they had opportunities to release buildings and go into smaller buildings…that was a part of it,” he said. “They based it on a low inventory level to be conservative because they didn’t want to overextend empty space. All of a sudden, the inventories came back up again and walls are starting to balloon out a little bit.”

“We’ve seen a cycle in Canada about expanding and contracting warehousing over the past 30 years,” said Peter Maropakis. “I’d like to think that we’re all getting a bit smarter, saying we don’t have to be completely leveraged with bricks and mortar across the country to achieve the service level needed. It feels like the pendulum has swung back and forth a couple of times in the last 30 years, and as we get more finite in our calculations, we can service customers with fewer DCs and less bricks and mortar.”

Figure 2

Figure 2: Figure 2: We asked: How many distribution centres does your organization operate (or outsource to) in Canada?

Yves Belanger found the trend to be counterintuitive. “I see the trend with fewer DCs but they wouldn’t be smaller; they’d be bigger. Most of my clients have consolidated in the last 10 years.”

Duane Chiasson thought the trend to smaller DCs could be the product of more direct-to-retail logistics. “It’s not touching the warehouse, “he said. “So there’s more virtual warehousing or very enormous turns. I mean, it’s only sitting on your warehouse floor for about two or three days. There’s more pressure for that.”

Adoption of technology

Figure 8

Figure 8: We asked: Which of the following types of equipment do you use in your distribution centres?

Yves Belanger found it surprising that 53 percent of respondents reported not using technology in their warehouses (see Fig. 8.) “Maybe because my clients are slightly larger than average, but I see technology pretty much everywhere I go now. I’m guessing that the smaller facilities may have a lot less technology. Maybe they should just go to a 3PL that has all the technology and not try to do it themselves.”

“I was just very surprised that there were still a lot of opportunities for more technology to be used,” he continued. “I know a number of companies that actually use technology in the wrong way, which means there’s huge opportunity for more technology.”

McKenna cast this result in terms of the need to stay flexible. “I was thinking about some of the items on here, for example, automated material, handling

Figure 3

Figure 3: We asked: What is the total budget for all of your Canadian distribution centre(s)?

equipment and specialized storage systems and robotics. Some of those technologies get you productivity gains but you lose flexibility,” he said. “And because the market is dynamic as it is right now, I think people say, ‘Okay, let’s set that aside. I need to be ready for anything and I need to be dynamic.’”

Dan Gowette agreed: “It comes down to how much, as a distribution centre, are you willing to invest into that newer technology if your customer base isn’t necessarily going to be all that interested in reimbursing you for it as part of that service provided? It’s very much a fine line.”

Maropakis suggested perhaps smaller companies just aren’t aware they can get into some technologies at a reasonable price these days. “When it comes to investing, maybe they’re not as savvy because they’re not going to the shows and seeing the technology available at a reasonable, entry-level price. That might be something that can scare someone off.”

Belanger observed that in many smaller companies that have adopted

Figure 4

Figure 4: We asked: Thinking about your budget for your warehousing/distribution centres in Canada (excluding freight costs), what proportion is allocated for contract services for 3rd party warehousing?

technology, it’s because they’ve hired someone who used to work in a larger firm. “Those are the companies where I have seen the proper use of technology and scanning equipment and I’ve seen like $100 million or less companies that are making very effective use of technology.”

Use of 3PL

There was quite a bit of discussion about the use of 3PLs.

Maropakis said looking at the research results that although 55 percent aren’t using third-party services, those that are, are deeply committed. As far as why companies use a 3PL he said, “there’s a certain safety in cost certainty, that maybe I’m not paying the best rate to have my units, widgets, shipped to my customers but I know how much it’s going to cost me. If I’m going to sign up to a building, I’m not sure what my volume is going to look like but I’m going to have this fixed asset burning a hole in my profit, that uncertainty pushes to a 3PL. They’ll say ‘I know the product that I want to buy, I know the product that I want to sell, but you can distribute it for me.’”

 

Figure 5

Figure 5: We asked: Thinking about your budget for your warehousing/distribution centres in Canada (excluding freight costs), what proportion is allocated for each of the following…?

“When we talk about smaller distribution centres it’s harder to manage your costs at a smaller scale than it is having a larger facility where there are shared benefits from multiple clients,” Kirkpatrick said. He cited the example of a company that only needs 10,000 square feet in a particular region: “If it’s in a shared facility of 100,000 sqf, now that company and all the others in that space gain efficiencies. So I think it will allow companies to look at outsourcing.”

Labour

According to the research, labour is the single largest cost in Canadian DCs. But it’s not what keeps DC managers up at night. The panel discussed why that might be.

“The amount of money spent on labour has been reduced, but the number of piece picks has gone up,” said McKenna. “In our business, with the advent of e-commerce, especially in the past few years, you’re doing drop ships or a retailer will sell it but it goes directly from you to the person’s house. We’ve seen a huge growth in that area, which takes a whole lot more labour than shipping to those DCs. It was kind of counterintuitive seeing those two numbers.”

“We hear a lot in our industry about labour management,” he added. “How are

Figure 6

Figure 6: We asked: Thinking about your budget for your distribution centres, what proportion was spent on labour?

we tracking our labour to standards? How long should it take to do something? That goes to our pricing, goes to our costing and goes to knowing who our good operators are and who are operators who need training or need re-allocating.”

It’s a matter of efficiency, said Gowette. “In our business, if we can go to the pick face once and pick three orders instead of going to that pick face three times, and with the integration of technologies that allow us to do that, obviously, the efficiencies are there to be had and, therefore, help to keep your labour costs in line.”

Kirkpatrick emphasized the importance of process definition. “It’s really setting up procedures. And we really stress the education—constant education—and making sure our labour understands what’s happening,” he said. “We’re adding the technology where we can to support our staff, but absolutely, it’s ongoing training and helping our staff become more efficient at doing their tasks.”

Figure 9: We asked: Have you done any of the following in the last year to control the operating costs of your distribution centre(s)

Chiasson agreed: “As long as I’ve got a program running and the efficiencies are there, then I’m not so worried about the labour because I’m billing for it. And whether I’m billing a client or whether I’m billing a program, the problem becomes when I’m starting a new program. When I’m picking the one-offs where I can’t get efficient with my labour costs—that’s when there’s a learning curve. That’s when I can’t even control that learning curve because everything that’s being shot at me is different and I can’t get any efficiencies.”

Belanger agreed and believes what it comes back to is “how do I plan for these things and how am I able to predict? Based on these requirements, today I’m going to need this amount of man-hours. Being able to react that quickly to the information is very important to be able to do that planning.”

The future

To close off the roundtable, panelists got out their virtual crystal balls and made their best guesses about where industry cost trends would go in the future.

Kirkpatrick said: “I think as an industry, attracting young people to our business can be challenging. And I think that organizations will really continue to look at that and say, “How to get the right people in with the right skill sets and how do we keep them?”

Belanger expected “a big trend will be being able to forecast a lot better what’s happening in the next few weeks.”

Chiasson thinks we’ll be using more “technology to bring down costs. Trying to find a way to train the employee, the staff person that’s going to be there for two or three years, compartmentalizing the labour down to a very structured way, using technology, voice picks, RFID so it doesn’t have to be one person that knows where everything is, it’s a management system and it’s a management system on the fly.”

Maropakis said: “We’re going to see a dramatic increase in pressure to reduce cycle times. And that has a potential, very easily, to drive costs up. But it’s trying to find that balance that’s an acceptable cost structure for that reduced lead time. I think that’s going to be our big challenge.”

For McKenna “it’s going to be smaller orders, faster—a lot faster—and cheaper. And it has to be perfect. So I think it’s just going to be getting granular and granular and granular, more and more.”

Gowette said: “I don’t think you’ll see the obsolescence of big-box DCs. I think we probably will see more, smaller DCs within the supply chain. But the advent of social media and it driving our lives will drive it down to the very smallest piece that we can distribute.”

Plexman was concerned with the Canadian marketplace: “One thing I think we should keep in mind is the US…I’ve seen it with a lot of my clients, where they’re not distributing directly in Canada any more, they’re doing it all through the US. So there is a trend going in that direction. It is a risk, for sure.”

The final word: Flexibility

While it may be uncertainty driving warehouse and DC managers’ concerns in 2014, the key to success lies in having the capacity to change to meet fluctuating demand.

Andrew Kirkpatrick summed it up neatly: “I think it all goes back to what we’ve been saying, flexibility—flexibility in labour, flexibility in your technology, flexibility in your space. Because the market is changing so quickly all aspects of your business have to incorporate flexibility. It’s hard sometimes to plan that far in advance when it’s changing on the spot.”

–From the July-August 2014 Print Edition