What does your DC cost?

by Array

MM&D MAGAZINE, MAY/JUNE 2011:

Are your DC costs on par with those of your peers? MM&D’s DC cost benchmarking study offers a look at what Canadian companies spend and how. With a research survey and roundtable discussion, Emily Atkins helps you find out.

If you are like most DC managers, keeping costs under control is one of your primary mandates along with ensuring that you are delivering on your performance targets. But like many DC managers, you may be operating in the dark as to how your costs measure up against other similar DCs.

That’s where this study and roundtable results may be able to help. In March this year MM&D, along with our partner, RBC Royal Bank, fielded a questionnaire to Canadian supply chain managers asking them to identify their costs as a proportion of their budgets.

We also asked them a number of other questions, including identifying their biggest challenge, how much third party they use, and what kind of actions they have taken in the last year to cut costs.

Once we had the results in hand, we invited a group of knowledgeable supply chain managers to discuss the salient parts of the results. This article is a synthesis of the quantitative and the qualitative research results.

Up at night?

We asked respondents to let us know what keeps them up at night regarding their DC operations. Space issues was the hands-down winner, with 16 percent reporting this as their chief concern. Timing and deadlines tied for second place with inventory management, at nine percent. Other concerns ranking fairly high were labour issues and transportation costs, both with seven percent. Six percent were concerned about costs in general.

When we looked at these results in detail, we discovered that DC managers’ concerns vary depending on their warehousing budgets, and the size of their DC. Space issues appear to be a bigger worry for those with smaller budgets, especially for those with the smallest third-party budgets.

The companies with mid-size DCs were marginally more concerned about space than those with the smallest warehouses, at 20 and 18 percent, respectively, but those with the largest spaces under management had by far the least concern in this area.

What the panel thought:

Both Reg Sheen and Dave Wood were surprised that nine percent of DC managers would say concerns about inventory management were keeping them up at night.

Jane Henderson said her client base definitely reflected the survey data, particularly in the areas of inventory management and space concerns.

“I’ve got a customer who does a lot of consolidation and distribution for a large retailer in Canada and managing those inventory turns and understanding what he can do to make things more efficient is something he’s focusing on all the time,” she said.

Aaron Lalvani pointed out that the concerns about space are very different if you are running your own warehouse versus having a 3PL run it. For a 3PL it’s about client acquisition, while for manufacturers it’s more about controlling seasonality and ebbs and flows in demand.

In-house or outsourced

Third-party logistics use across the board is at 19 percent, versus 81 percent for in-house warehousing. The smaller the warehouse budget, the larger the proportion of warehousing done by a third party. For those companies with the smallest budgets—under $250,000—12 percent of their activity was accounted for by a third party. For those with DC budgets in the $250,000 to $999,000 range, the proportion was 21 percent third party to 79 percent in-house,

while for the companies with the largest DC budgets—over $1 million—the split was 20 percent third party and 80 percent in-house.

Certain sectors seem more fully reliant on third-party providers. Agriculture was the heaviest user at 18 percent all third party, followed by the high-tech sector at 14 percent and automotive at 13 percent. The health and pharmaceuticals sector came in at the lowest proportion, with only seven percent using only 3PL handling.

What the panel thought:

The panel discussed the reasons a company should consider using a third-party provider.

Gord Crowther said it depends on the size of the company and the complexity of the operation. “Some people should do their own warehousing, and that’s warehousing with a small ‘w’. I’d encourage them to do it better and employ some technology,” he said. “They can acquire technology that they couldn’t afford 10 years ago.”

Lalvani looked at medium-size enterprises with revenues in the $20- to $35-million range. In the retail sector these companies are being called upon to do increasingly specialized functions in order to do business with customers like WalMart. He noted when they don’t have the labour pool to meet the mandates, they need to have using  a 3PL on their radar as a means to manage the demands of big clients more cost effectively.

Reg Sheen pointed out using a third party can help a company get items like debt and buildings off their balance sheet. “One of the reasons why you go to a  3PL is to take advantage of that opportunity,” he said. “It’s their business, their core competency, and they can, in most cases, do it as well or better.”

Chiasson thought there were three inflection points where a company should consider a 3PL: when they are entering a new region and are not sure they need their own DC; if it’s a brand new business wanting to avoid the start-up costs of  a warehouse; and when you need your DC costs to be predictable from month to month.

Where the costs are

Labour is by far the largest single expense for any DC. The most notable variable that affects how much of your budget is allocated to labour is your sector.

While the overall national average is 37.2 percent (with a five percent premium for unionized operations), the retail sector average is 54.4 percent. Also coming in above the national average are health and pharmaceutical, automotive, food, consumer products and natural resources.

What the panel thought:

Chiasson commented on the cyclical nature of DC work, pointing out that managers can reduce the cost of seasonal labour by “hanging on to the talent during the low season and building up the inventory that you need to get ready for the high season, as opposed to ‘labouring up’.”  

Wood stressed the importance of productivity, which he argued is a product of managers who listen and respect their staff, along with proper training and good equipment. “The biggest thing I find is listening to employees. They know what they’re talking about; they know what their job is.”

Sheen agreed with Wood, and highlighted safety as a key piece of the training and knowledge that DC workers must have. “Safety alone can also impact your costs directly through WSIB penalities and premiums.”

Taking action

When we asked whether they had taken any action to reduce DC costs in the past year, an overwhelming 92 percent of respo

ndents said they had. The most common action taken was to improve warehouse processes (65 percent), followed by improved inventory control (58 percent) and improved IT (49 percent). Changes to DC layout were next with 46 percent, and staff reductions were undertaken by 43 percent. Consolidation of locations was done by 24 percent, and contracting a 3PL was done by 16 percent.

Looking more closely at what actions were taken, (Figure 8: Actions taken by budget) there is a big difference based on

how much warehousing budget companies have. Of those who consolidated, 30 percent had DC budgets over $10 million. While only 19 percent of  those who shifted business to a 3PL were in that budget ran

ge. By contrast, of those who contracted a third party, 30 percent were in the $500,000 to $1 million budget zone while only 16 percent in the budget range consolidated.

What the panel thought:

Reg Sheen noted that one of the most expensive things a DC manager can do is decide to keep inventory in an additional facility. “The way you leverage those four walls is by looking at how you store your product internally using different racking configurations—VNA or double-deep—and looking for the most optimal way to store products,” he said.

Gord Crowther agreed, “If you’re racking to the fifth level as opposed to four levels, you’re not brilliant, but you just got a 20 percent improvement in your space, but you’re paying the same taxes, heat and cooling.”

On the question of consolidation, Woods noted that his company, Mother Parkers Tea and Coffee, consolidated a warehouse last year. The change was made possible by changing requirements in the food industry—with shelf life of products dropping—plus different elements in the company working together to increase turns dramatically. “Based on carrying less inventory, having it all available on a timely basis, we’re consolidating our facilities now,” he said. “And that’s purely based on different groups within the company working together.”

Henderson noted another client example, in which the company opened a western DC to be more responsive. “What they found was they had more working capital tied up there because they had to store more inventory,” she said. “And often they didn’t necessarily have exactly what was needed to meet the demand so then they were still shipping from Ontario out west. So consolidating

was a very good business decision. They were still able to service their customers, they brought their inventory back so they could manage it better and they’ve got less working capital tied up in inventory because they’re not duplicating it.”