Planning DC’s For An Unknown Future
Or, Where’s Nostradamus When We Really Need Him?

By Drew Hale and Art Van Bodegraven

“The times, they are a-changin’ . . .”

Planning warehouse and distribution centers able to keep up with rapidly changing supply chain strategies has become more difficult than ever. Adaptability is becoming as important as operating efficiency as a criterion for measuring success in facility planning.

We’ve moved past the time when it was good enough for distribution managers to get high marks for cost per unit and order fill rates. The day is at hand for managers to be measured on their ability to turn on a dime to accommodate new demand profiles, changing (and more distant) sources, shifting geographic trends, redesigned networks, new products and lines, and accelerated/shortened product life cycles - and do it seamlessly.

Not long ago, the processes in a newly built distribution center were expected to support five to ten years of business activity before functional activities got out of sync with the demands of the business. There was a foreseeable business future.

Now, more companies are required to plan like Hewlett-Packard, where a logistics process, by design, may be expected to last no more than three years before new processes – and new products - supplant the old. Unfortunately, not every company that needs to do this, is. And those that haven’t learned how will be paying for the failure on the installment plan.

Today, it is a near-guarantee that the mission of the distribution center will change, and in unpredictable ways, within the first few years of operation. For planners, this creates what sometimes seems to be Mission: Impossible - design a facility that can be made to adapt to whatever comes along.

So, What Should We Plan For?

Let’s tune in on a hypothetical, but realistic, planning conversation around setting the program for a new DC . . .

CEO:

“For us to go after the capital, we’ll need assurance that this plan is flexible! And efficient! And we want to be the leader in application of DC operating technology, and the project must have a compelling ROI.”

Facility Planner:

“Flexible. Yeah, that’s the ticket. We can build in flexibility, of course. We’ll need to plan for a range of scenarios. What changes are likely?”

Marketing:

“Be ready for a large shift to on-line orders and consumer-direct shipments. We’re not quite sure when the e-enabled stampede will kick in, but it’ll be huge!”

Logistics:

“ Our transportation network will look entirely different in two years. Lots more LTL and parcel shipments, far less truckload. Maybe some air.”

Customer Service:

“Though revenue will grow modestly, we’re expecting twice as many orders as today, and more broken case shipments. And the orders we receive today, we’ll be shipping tomorrow. Those we don’t ship same night, anyway. If our major retail customer tells us to ship directly to their stores, and ticket the merchandise, too, then how will we get the stuff out the door?”

Product Development:

“If results from the pilot program are promising, then we’ll launch 18 new products this year, and each has 70 to 120 SKUs in parts.”

Facility Planner:

“Flexible. Yeah, that’s the ticket. Maybe a 3PL . . .”

Purchasing:

“It’ll be a miracle if we can get, and keep, all this new stuff in stock. You’d better plan on backorders doubling. And returns tripling.”

Customer Service:

“If we’re going to honor the mission statement, expedites and premium shipments are going through the roof.”

Marketing:

“Maybe this is the year to go from 4 catalogues to 12!”

CEO:

“We shouldn’t rule out an acquisition that could double the business, if my secret negotiations pan out. And, I’m still thinking about selling off the non-performing division. If we do, we’ll get rid of 14,000 SKUs and $100 million in unprofitable sales. Or, maybe we’ll hold on to it for a while, and spruce it up so we don’t take too big a haircut on the sale. ”

Facility Planner:

”Flexible. Yeah, that’s the ticket.”

* * * * *

Accommodating A Changing Mission For The DC

What to do, what to do? Before concluding that the sky is falling and that someone should tell Henny-Penny, don’t give up. There are innovative ways in which facility-planning engineers have designed equipment layouts and building configurations to accommodate the possibility – no, the probability - of a changing mission.

Building A Transition Plan For Volume Growth

A key question for DC design is, “What are the break points at which incremental volume growth will call for an upgrade to an automated or mechanized process solution?”

When capacity is constrained only for short-duration peaks during the year, and “normal” activity can be handled easily for the remainder, manual processes can be efficient and appropriate. And there’s no incentive to explore an automation investment.

Smart DC operators will take the edge off the peaks by pre-working plannable orders, filling orders directly from received stock, and rebalancing workforce assignments.

However, if growth in unit volumes through the receiving-through-shipping cycle continues to the point of becoming the new norm, investment in additional automation becomes justified. Any suspicion that this might happen demands a transition plan to the next level of automation as an integral part of the initial design process.

To prepare a facility to take advantage of increasingly sophisticated technology, the initial layout must be designed both for today and tomorrow. If the probability of a transition is high, then initial processing areas may be located so that they don’t occupy the prime space. The most desirable space will be reserved in dotted lines on the layout for the future mechanical components.

At transition, the value is evident. Active processing operations can continue, while conversion and testing is initiated in the less-active section

Being Ready When We’re Forced To Pick-Pack From Broken Cases

Jim Apple reminds us that, “Radically increasing piece picking using our current practices may well constitute suicide in our warehouses.” But today’s market for many businesses is characterized by the movement to smaller and more frequent orders and shipments, which often implies broken case picking, sometimes a wholesale shift from case picking to piece picking as a dominant mode.

The transition from case picking to broken case picking is one of the most expensive labor cost problems that DC management can face. One problem begins with the measurement system – the scorecard.

Cost per case, cost per unit, cost per order - the manager’s report card takes a hit with the first broken case order: more labor per case shipped. All too often, the organizations and executives driving the shift to “eaches” are the last to understand what it means to operating costs in the DC. All too seldom is DC management included in the upfront strategic sessions that generate these decisions. The operational, functional silos are still out there.

So, part of the planner’s task is to assess how to handle products and orders now picked in cases and pallets – how to set up broken case or piece picking. Can broken cases be separated from full cases? Will volumes justify different rack and pick zones? Can waves be structured around order quantities? Can our systems support separate primary pick locations for both full and broken case picks for the same SKU?

These and other questions need either answers or “best guesses” to build efficient pick systems to handle all modes. And, the solutions for broken case/piece picking are orders of magnitude different from case/pallet pick processes.

Additional factors will influence facility layout:

  • Sizing the pick location to handle all or part of the inventory
  • How, and how frequently, to replenish the pick location
  • Whether the pick will be done an order at a time, in small batches, or in larger waves,
  • Whether conveyor systems are used for routing orders to outbound sorting and consolidation

The answers can be found in the product sales, purchasing and receiving, and inventory data kept for each product – or in best estimates of how movement might develop over time, prepared in advance to support front-end planning of facility and process alternatives. This analysis (or projection) will categorize which products and families belong in which type of storage and picking equipment. The future layout of conveyors and processing areas will follow. Solving the broken case/piece picking challenge on the fly is almost sure to lead to a disappointing false start.

Providing (More) Value–Added Services

The trend driving the provision of more in-DC value-added services comes from both the sourcing end of the business and from customers.

On the sourcing end, supply chain initiatives that drive inventory levels down by postponing value added services, like final packaging and labeling, are resulting in inventory deployed at the DC that still needs to be labeled, packaged, embroidered, printed, configured, loaded with software, populated, kitted, folded, re-boxed, wrapped - whatever.

From the other end, customers are negotiating for traditional store back-room activities like price and security labeling, assortment building, and display-ready product assembly, done in the DC.

Space provided for undetermined process flows (to handle value-adding) can be a lifesaver.

Product Or Package Changes

A dramatic, and frequently unanticipated, DC impact occurs when suppliers’ cartons get larger or smaller, or when the carton quantities change, resulting in throughput and efficiency degradation. Cube per inbound carton trends may be used as an indicator of carton size changes over time. A shift to smaller cartons can rob facility throughput (conveyor capacity cartons per hour)

Costly manual handling follows when the system designed for 16”x20” cartons begins to encounter 20”x24” boxes. Mechanized systems can also break down when carton weights exceed design limits, or when quantity changes start to generate significantly lighter boxes.

Similar issues affect storage systems. When cartons change, pallet-stacking patterns can change. An apparel distribution center was severely handicapped when, counter to forecast, the proportion of fleece to T-shirts flip-flopped. Facility unit capacity was drastically reduced.

These things don’t just happen. But the time to plan for their solution is early. The value of sensitivity analysis in design – comprehensive “what if’s” – is incalculable.

Partial 3PL Outsourcing

The economics of outsourcing can lead to a problem for DC management, when a company isn’t looking at distribution operations by channel or segment activity costs. The high-volume, simpler, products and processes can be sent out to a 3PL, often to relieve storage or handling capacity pinch-points. The remaining, more process- and labor-intensive, pieces are left behind. Naturally, their unit and order costs will go up, now that they are no longer subsidized by the fast movers.

For the DC planner, when future outsourcing is an option (and isn’t it always?):

  • Negotiate favorable lease-ending terms
  • Develop and document clear process descriptions and resource requirements, and
  • Plan for transition.

And, be sure that your activity costing methods are sound.

More Change Factors And What Might Be Done About Them

Other things can happen to throw off the best laid plans and the most bulletproof logistics processes. The list is almost endless, and includes:

Added product lines

Which consume both storage capacity and pick locations. Sometimes a mezzanine second level pick floor is added, when ceiling height is sufficient..

Adding Inventory

Which eats up raw capacity, risks obsolescence, and can inadvertently take up prime locations when profiling has been inadequate – or missing.

Product Configuration And Packaging Changes

Such as hanging goods vs. boxed garments.

Order Frequency/Order Size Changes

Usually more often and smaller.

Freight Economies Change

Often involving more parcel and LTL movement, and lower cube utilization.

Operational Centralization – or Decentralization

Implemented for the right reasons, can yield significant operating saving or service level improvements.

The solutions – to the extent that there are solutions – lie in early analysis, early planning, early design inclusion, and the preparation of transition scenarios that might never be used, but will make someone a hero if they are. The added up-front investment may chafe the CFO, but is cheap insurance against the cost of inevitable change.

* * * * *

Flexible. Yeah, that’s the ticket.

Drew Hale is a Partners in The Progress Group, LLC, the Atlanta-based Supply Chain Logistics consultancy. He may be contacted at dhale@theprogressgroup.com (404-876-3435), or through TPG’s web site, www.theprogressgroup.com

Art Van Bodegraven is a Partner in The Progress Group, and the former six-time Chairman of  TPG’s international affiliate, The Supply Chain Group.  He may be reached at (614) 336 0346, (614) 893 9414 (mobile), or avan@theprogressgroup.com.
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